Bond stars in fiscal adventure

All eyes on De Montfort's move to seek £110m in 'prudent' long-term financing. John Morgan writes

July 26, 2012

De Montfort University's decision to raise private finance for building projects by issuing a £110 million bond has seen its vice-chancellor "besieged" by other universities seeking advice on how to follow suit.

The Higher Education Funding Council for England has given consent to issue the bond, a move the university confirmed on 19 July. This could signal Hefce's willingness to support universities seeking to fund infrastructure through such measures while public capital funding is slashed and bank lending slows.

De Montfort has borrowed £90 million - with another £20 million held in reserve - in a 30-year public bond financed by four major lenders: M&G Investments, Legal and General, Scottish Widows and Kames Capital. It is UK higher education's first public bond - in which an issuer pitches to a market of different prospective investors - since the University of Greenwich issued one in 1998.

Dominic Shellard, De Montfort's vice-chancellor, said the attraction of a bond was obtaining finance at a "very low rate of interest [under 5.4 per cent] fixed for 30 years".

He added: "I've been besieged by universities phoning up and asking how we managed to do it."

Professor Shellard said De Montfort's bond "can never become more expensive"; that the institution had been "incredibly prudent in our forecasts" on student recruitment to ensure it met payments; and that the bond was "not secured on our assets".

Chris Hearn, head of education at Barclays, which managed De Montfort's bond issue, said using investor funds was "a very sensible route to replace long-term capital that banks will find difficult to lend in the way they have in the past".

Charlotte Weir, a director in the UK debt capital markets team at Barclays, said investors in De Montfort, which specialises in courses linked to the creative industries, felt it was in "a strong position in terms of the courses [it] offered and the growth prospects around the international student base".

Ratings agency Moody's assigned De Montfort its second-highest credit rating, Aa1, for the bond issue, based on the sector's "strong regulatory framework" and the "very high likelihood of extraordinary support from the UK the unlikely event of [the university] experiencing acute liquidity stress".

Professor Shellard said: "Hefce and the investors took reassurance from the strong regulatory framework in which we operate."

A Hefce spokesman said: "There are many ways in which a university can borrow money, including through bonds, and we treat each request for consent on its merits."

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