Bond plan will shake university funding world

Northampton is revolutionising financing by going to the market for the money it needs to ‘future-proof’ itself, says Nick Petford

February 19, 2015

We believe that the new funding model we have pioneered has the potential to revolutionise financing options for others

When I walk around our campus, I see a changing educational landscape. Students are embracing digital methods of learning, and new tools complement their textbooks. They are asking for flexible study options, creative environments and engaging teaching.

This evolution has been the driving force behind our decision to undertake one of the largest university redevelopment schemes currently under way in the UK. It has also led us down new paths for the sector.

Future-proofing our institutions and standing out from the crowd will increase in importance over the coming years, and taking different approaches, whether by creating new learning techniques or using different funding models, will be crucial to success.

Currently, we provide a teaching experience across two campuses. Our relocation project will integrate both sites into a single town-centre campus, in close proximity to new halls of residence and within one of England’s 24 Enterprise Zones. This will improve our services for students and allow us to work even more closely with the local community in support of its growing economy. As well as creating an inspirational place of learning and new retail and leisure outlets, the project also includes a commitment to develop public spaces in and around the campus.

Anticipating the core business of future student wants and needs – and the digital environment best suited to deliver them – is not without challenge. Nevertheless, we believe that the new funding model we have pioneered has the potential to revolutionise financing options for other institutions intent on a similar transformation.

In November 2014 we secured a £231.5 million bond to support the development of the town-centre campus. We are not the first UK university to issue bonds, but we are the first to have our offering guaranteed by the Treasury. With some exceptions, UK universities have mostly fought shy of capital markets, relying instead on bank debt to finance capital projects. This is understandable as, until recently, help from UK funding bodies and other government agencies has been generally forthcoming, minimising the need to borrow. In addition, the financial memoranda between funders and institutions stipulated tight borrowing constraints that made access to markets challenging.

But in this age of austerity, which looks set to continue whatever the outcome of the general election, traditional ways of project financing are no longer up to the job. There is a growing need for institutions to explore alternative funding methods, whether that be small-scale crowdsourcing or large-scale debt financing. Embracing new modes of finance is not without risk: something the Higher Education Funding Council for England has recognised in recent revisions to its financial memorandum for universities – and, specifically, the mutually agreed option to place an observer on our board. But when set against the levels of borrowing considered the norm in the commercial world, UK universities still look timid.

I know that some people at my university are nervous. But our decision was made following extensive research and specialist independent verifications by financial experts, supported by Hefce. The model may be new to our sector, but its benefits are clear – it has enabled us to secure a sustainable rate of borrowing that allows the university to pay back the funding annually over a period of 40 years. In particular, the high level of demand – which, it is fair to say, exceeded our expectations – allowed us to secure a low, fixed-term interest rate below 4 per cent. So, despite its size, the bond is a relatively low-risk option.

In the gloom surrounding government funding cuts, the demand for our bonds is a positive signal from the capital markets that the sector is seen as stable and having significant investment potential. However, this may yet change – not because of volatility in student numbers, but through an unfunded reduction in tuition fees, as the Labour Party is rumoured to be considering. It would be ironic indeed if an untapped source of long-term funding was cut off in its infancy by short-term political expediency ahead of a general election.

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