LSBU writes off £16 million ‘bad debt’, including overseas fees

London South Bank University has written off £16 million in “bad debt” in light of “weaker repayments” on debts including tuition fees owed by overseas students, pushing the institution into deficit and affecting a banking covenant.

Unlike home students, whose fees are paid to universities by the Student Loans Company (SLC), overseas students and employers funding students are responsible for making their own fee payments to universities.

With domestic teaching funding falling under the frozen £9,250 fee cap in England, many universities have sought to step up international recruitment – but that could leave some facing problems with unpaid fees if there is recruitment from nations where students struggle to fund themselves, or as the cost-of-living crisis affects students.

LSBU’s 2022-23 financial statements refer to a “£16.3 million charge to the bad debt provision”, saying this charge shifted the institution’s overall operating break-even position “to a deficit of £16.4 million”.

The statements also refer to debt being “a combination of fees owed by individual self-paying students as well as funds owed by the Student Loans Company (SLC), Education and Skills Funding Agency (ESFA) and organisations sponsoring students”, and refer to an “increasing level of indebtedness”.

The £16.3 million bad debt provision had implications for LSBU’s banking covenants – agreements with lenders that an institution will meet specified levels of financial performance, with potentially crucial effects on an institution’s financial viability.

“At 31/7/23 the university group had breached one financial covenant attached to its bank loans,” say the financial statements for the LSBU Group, which also includes a further education college, a technical college, an academy school and a sixth form. Meeting with financial reporting standards, those loans were “classified in these accounts as creditors falling due within year to reflect the increased level of risk”, the financial statements say.

But with waivers subsequently issued by the lending banks, there was no requirement to repay the funds within a year and the reclassification was an accounting technical requirement, the university said.

“We have proactively diversified our income by growing areas beyond the core, fixed rate, Student Loans Company-focused home undergraduate student body,” an LSBU spokesman told Times Higher Education.

“This has led to a growing exposure to self-payment from students and businesses, some of whom have been especially impacted by the current cost-of-living crisis. The university took the opportunity to review the likely level of debt recovery from the last three years as part of our accounts preparation work and chose to make a one-off additional allowance for weaker repayments in the current environment.”  

He added: “The decision to increase the bad debt provision as part of the accounts preparation would have led to a breach of a banking covenant but, given the nature of the breach, the banks offered to waive it. As this waiver was received after 31 July [the end of the university’s financial year] the audit approach required the change in the classification of the existing financing at the balance sheet date.” 

Potential breaches of banking covenants have become a key issue for several universities. If a university’s governing body believes the institution might breach its banking covenants over the coming year, that could leave the governing body unwilling to class the institution in financial statements as a “going concern” able to meet its financial obligations over the next 12 months.

LSBU’s board of governors says in the 2022-23 financial statements it is “confident that the group and parent university will be in compliance with its debt covenants even in potentially severe but plausible downside scenarios”, meaning the statements were signed off on a going-concern basis.

The “principal risks to successful financial delivery in 2023-24”, the board says, “relate to meeting student recruitment targets, the financial turnaround of South Bank Colleges, pay demands, energy and other inflationary cost increases, collection of tuition fee income, compliance with financial covenants attached to loans and interest rate risk”.

john.morgan@timeshighereducation.com