New rules let borrowers avoid Hefce hurdle

Universities could be allowed to seek cash without asking funding council’s permission

May 15, 2014

More English universities could be allowed to borrow money without seeking permission from the funding council under new financial rules to be brought in later this year.

The Higher Education Funding Council for England has published its analysis of responses to a consultation on changes to the financial memorandum, in effect the terms and conditions attached to funding by the council.

After the consultation, the financial memorandum will in future be known as the “memorandum of assurance and accountability”.

On borrowing, Hefce will still assess “whether the proposed level of financial commitment increases the risk to the public or the collective student interest; if so, the institution will be required to take action to reduce that risk”.

But at present, universities seeking new borrowing must ask Hefce’s permission to push their “annual servicing costs” – the cost of their debt – above 4 per cent of their income, if the borrowing would take the institution above that threshold.

In future, although there will still be a single borrowing threshold above which permission will be needed, the annual servicing costs test will be removed. Instead “a multiple of earnings before interest, taxation, depreciation and amortisation”, or EBITDA – a widely applied measure of company financial performance – will be used.

The switch to EBITDA is thought to have come about because, as banks have moved increasingly towards shorter-term lending that produces higher annual servicing costs, larger numbers of borrowing requests have been submitted to Hefce. The change would head off any further increases in the number of requests for borrowing.

Hefce’s analysis also notes that consultation responses highlighted “concerns that difficulties at alternative providers could adversely impact the reputation of the higher education sector as a whole”.

The funding council periodically reviews the financial memorandum, with the last having occurred in 2010. The new memorandum of assurance and accountability will come into effect on 1 August and will be published in the coming weeks.

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