Interest increases in issuing bonds to fund improvements

Institutions seek competitive alternative to bank loans for facility upgrades, writes Simon Baker

February 23, 2012

Growing confidence about student numbers next year is likely to lead to a number of universities kick-starting campus investment projects by raising vast sums on the bond markets, it has been predicted.

Barclays Corporate has seen a "doubling of interest" in the past nine months from institutions keen to find out how to issue bonds, as long-term bank borrowing becomes more difficult and public sources of capital dry up.

The next year would see "significant programmes of investment" being started by institutions keen to improve facilities and attract students, according to Chris Hearn, head of education at Barclays Corporate.

Bonds - with their promise of delivering large sums of money at low rates of interest - provide the ideal opportunity to fund such expansion and have become much more competitive compared with long-term bank loans, Mr Hearn said.

"For institutions that want long-term certainty over their financing, the debt capital markets are probably going to be the way forward," he said. "There will be institutions entering this market I am sure in the next year or so."

Universities in the UK have traditionally opted to borrow from banks - about 90 per cent of the £5 billion lent to the sector comes from such sources.

However, the credit crunch means that banks have become more wary about lending for long periods, such as 20 years, despite the sector still being seen as a safe bet for repayments.

Consequently, issuing bonds - common in the US higher education sector - is becoming a more viable and less costly option.

Barclays recently held two workshops on how to access bond markets, which were attended by representatives from about 25 institutions. "We've had absolutely no difficulty in getting people along," Mr Hearn said.

Universities wanting to issue bonds could either enter into "private placement" agreements with investors such as insurance companies or pension funds, or achieve a credit rating and enter the public debt capital markets.

Although the second option would usually involve sums of at least £200 million - possibly too much for most institutions - universities are looking seriously at the option of "clubbing together" to issue public bonds, achieving a joint credit rating in the process.

Universities could speed this process by securing short-term loans from banks with a view to refinancing the debt at a later stage through a bond issue. "The expectations of this round of students could be a lot I get a sense that the sector will need to invest and will need to do it soon," Mr Hearn said.

He added that although institutions across the sector were interested in entering the bond market, there was still work to be done in "educating" investors, who may be familiar only with elite research-intensives such as the universities of Oxford and Cambridge.

Cambridge was reported in 2010 to be considering issuing a £300 million public bond.

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