Impacts of COVID-19 on the higher education sector debt market has been saved
Impacts of COVID-19 on the higher education sector debt market
In any given year, September is a critical month for the Higher Education sector. The September 2020 admissions numbers will prove a crucial point in the road for Higher Education institutions around the country, as they consider the fundamental impact reduced student numbers could have on their viability now and in the future.
A central part of this existential challenge is institutions’ ongoing funding arrangements and the ability to meet any liquidity or covenant challenges brought about by any reduced overseas students or overall admissions and the corollary impact on campus service revenues. Institutions will have undoubtedly spent a significant amount of time considering various admissions scenarios, the accuracy of which will be crystallised during September, and thus to some degree, their fates will be sealed in terms of funding requirements in the near term.
So what can Higher Education institutions do to address this financing need?
There are a number of questions that we believe management teams should be asking themselves and considering how to address; we have set out what we see as the main challenges below and how these might be addressed. In all cases, however, ranging from better-than-expected admissions numbers to large falls and a significant liquidity and/or covenant need, early engagement with financing counterparties is crucial. As the six months since March 2020 have shown, when lenders are inundated with requests for covenant waivers or additional financing, every borrower’s lender process is slowed down by the influx of requests for support. Lenders with constrained bandwidth and credit assessment capability will value those borrowers who have a financing plan that has been rigorously designed and tested with an independent third party, such as Deloitte Debt Advisory.
1) How long do my most-likely and reasonable-worst cases show that my institution has a liquidity need?
Generally, the matching principle (linking length of financing need to length of financing) should be followed – a short-term need should not be financed by long term debt (e.g. bond financing) and vice versa. Tenor requirement has a direct impact on the types of lenders approached (and the type of debt financing instrument) as well as the pricing of the debt financing. Lenders are likely to take some additional level of comfort from plans and forecasts that have been robustly challenged by third parties. These forecasts should set out a detailed explanation of any cost reduction plans in place; a common theme of discussions since March 2020 has been the keenness of lenders to see all stakeholders sharing the impact of supporting the borrower’s liquidity position.
2) If I have accessed government backed schemes, such as the Covid Corporate Financing Facility (CCFF)1, how will I fund any outstanding debt when those schemes come to an end?
Borrowers may have spare capacity in their existing financing arrangements, but if not, the end of the government schemes has been well publicised and so borrowers should engage with lenders sufficiently ahead of time to avoid being swept up in a wave of eleventh-hour requests.
3) What impact on covenants will my expected 2020-21 performance have?
This will determine the tone and content of conversation with lenders. Our experience has shown that amendments to covenants without new money requirements are easier for lenders to contemplate and agree, but in all cases early engagement is vital.
4) When do I need the money, and/or when will I face a going concern challenge?
Given pressures on banks and finance providers exacerbated by high volumes of requests from borrowers, we would expect a financing process (initial engagement to signing) to take at least 10-12 weeks; the more time that borrowers can give themselves and their lenders to execute, the more comfortable the process (and the borrower’s auditors) will be.
5) What is the likely impact of the 2020-21 intake (and any subsequent years) on my institution’s credit rating?
While Moody’s has suggested UK volumes remain resilient for the upcoming academic year2, they also highlight the importance of strong balance sheets on continuing viability of UK HE institutions3. Any negative impact on an institution’s credit rating will have a knock-on impact on availability of financing from the debt capital markets, and on pricing of such instruments. This further reinforces the importance of matching tenor to need, to ensure current conditions do not lead to issuance of bonds at higher coupons than the long term average rating of an institution would suggest, leading to high financing costs over long periods of time.
In addition to the above, there are other factors which will have an impact on the shape and terms of any near-term financing; these are largely out of borrowers’ control but are important to consider when planning: Which lenders are active in lending to HE institutions? Which financing markets are open? What is it likely to cost?
Early engagement with lenders is key
We work with more than 100 borrowers a year across a range of transactions, including a number of COVID-19 influenced amendments and financings. A common feature of all of these transactions has been the perceived value of early engagement of borrowers by both lenders and borrowers, as well as the importance of leveraging well-nurtured lender relationships. This builds good will with lenders as well as gives borrowers the best chance of transacting in the required timeframe.
As has often been said, these are unprecedented times, and assistance in navigating the financing markets could make the difference between a good financing outcome and a great one. If you would like to discuss more about how Deloitte could assist you, please do not hesitate to contact one of the Deloitte Debt & Capital Advisory team below.
1 The CCFF scheme currently permits issuance of CCFF commercial paper until 21 March 2021, as stated in the market notice published by the Bank of England on 19 May 2020, as amended 26 May, 22 June and 3 August 2020.
2 Moody’s Investor Services, 1 July 2020
3 Moody’s Investor Services, 18 May 2020