Managing financial risk in the higher education sector

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Universities can lock in historically low interest rates for upcoming and future funding requirements writes Chris Munson, director, Commercial Banking Markets at Lloyds Bank

Traditionally, universities have looked to bank financing to provide funding for their capital expenditure needs. But an increasing amount of higher education institutions are diversifying, turning to both the public bond and private placement markets for longer-term funding, while still relying on strong banking relationships.

Although universities have been issuing bonds since the late 1990s, from 2016 to 2018 this financing route has gained traction, with investors seeing universities as attractively low risk. The University of Leeds and Cardiff University issued public bonds in 2016. Other high-profile examples include the University of Oxford, with a £750 million 100-year bond issue in 2017, and the University of Cambridge which, in 2018, issued £600 million in bonds in two £300 million tranches.

Many universities have also been turning to the private placement market: Durham University issued £225 million via this route with Lloyds Bank acting as one of the placement agents.

What’s driving borrowing?

Government funding for the sector is limited and universities fund the majority of investment in new facilities and refurbishment themselves. Borrowing enables this and is rising. It has trebled over a decade, to £12 billion in 2018.

The background to this is an increasingly competitive higher education landscape where universities are upgrading facilities, such as accommodation, to enhance the student experience.

This has led to a building boom: capital projects worth nearly £8.8 billion have been started since 2014. At Lloyds Bank, we have funded projects such as student residential accommodation, campus relocation, new learning and teaching facilities, STEM labs, research facilities and sports facilities. This investment in capital estates is a trend that we expect to continue, despite the potential political headwinds the sector may face in the future.

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Current market conditions

There has been a general downward shift in long-term interest rates over the past 10 years. At the time of writing, 20-year UK gilt yields and fixed swap rates are trading under 1.4 per cent and 1.2 per cent respectively, having been close to 2 per cent in December 2018 and above 5 per cent in 2008. These are historically low rates of interest for long-term borrowers.

How Lloyds Bank can help

Lloyds Bank has many years’ experience in helping higher education institutions raise finance and manage long-term interest rate risk. We offer short, medium and long-term funding across a range of different structures, as well as a wealth of expertise.

Universities looking to raise financing in the near future can use interest rate hedges to lock in current rates for financing due to be raised in the coming weeks, months or years.

The bespoke nature of interest rate hedges enable the borrower to determine the amount, term and start date of the hedge in order to match their borrowing requirements.

As part of a prudent risk management strategy and in accordance with a robust treasury policy, many universities are using interest rate hedges to manage their existing and future financing.

If you wish to discuss funding solutions and managing long-term rate risk, please contact your Lloyds Bank relationship director or speak directly to Chris Munson on 0207 158 3968.