Financial Resilience: Six Practical Steps

The 2019 OfS report on financial sustainability acknowledges that English Higher Education Providers “will continue to operate in a complex, challenging and uncertain environment for some time”. It is increasingly challenging for Providers to make judgments on their financial position looking forward 3 or 5 years, to demonstrate compliance with the ongoing conditions of registration as regards financial viability and financial sustainability.

When preparing financial forecasts, what assumptions do they make around the likely level of tuition fees going forwards post-Augar? Or the USS deficit position? Let alone the impact that Brexit may or may not have on the number of EU and non-EU students coming to study in the UK.

This is not just a question of compliance with regulatory conditions, however important they may be. Levels of borrowing in the sector are at the highest they have ever been, and are predicted to rise still higher. A crucial part of financial resilience is therefore to ensure that not just OfS, but also third party funders, remain satisfied. They too have a significant interest in the ongoing financial health of the sector.

Given that the uncertain policy and political environment is unlikely to become any more certain in the near future, there are some practical steps that Providers can take in order to protect themselves.

1.  Know what is in the finance agreements

Ensure that the Governing Body and key decision makers fully understand the terms of any existing lending arrangements. Finance agreements may have been entered some time ago, and there may no longer be anyone in the finance department who was involved in their negotiation or is familiar with their terms. An audit of funding agreements will ensure that everyone is familiar with the restrictions that bind the university and provide comfort that the university is compliant.

NB Donʼt assume that if there is more than one agreement with the same lender that they will be on identical terms. Precedent bank documents have altered significantly over time.

2.  Understand the financial covenants

Financial covenants are the metrics that a lender uses to assess financial performance of a borrower. These may have been set – maybe many years ago – in a different financial environment. Certainly, there are many agreements still in place, which contain the old ‘HEFCE’ style covenants. So, it is quite possible to breach a financial covenant without being in an insolvent position, but maybe as a result of the impact of accounting standards changes or regulatory change.

Make sure that the Governing Body and key decision makers understand what financial covenants apply across all agreements, how these are calculated and what the definitions are, and continually monitor whether forecast events will (or may) cause these covenants to be breached.

3.  Donʼt ignore the lenders

If updated forecasts are showing a potential issue with a financial covenant in the coming year, involve the lender early. It will be much easier for a lender to be flexible and supportive before a breach has actually occurred, when there is time to discuss why the issue has occurred, how it can be remedied and how the covenants may be amended or waived to protect both parties.

Once a covenant has actually been breached, the lender will be on the back-foot and may have limited room to manoeuvre. And even if that lender is supportive, the existence of the breach may cross-default into other agreements.

4.  Keep auditors in the loop

In order to sign off the financial statements on a going concern basis, the auditors will need to be satisfied that there are financial facilities available for at least the next 12 months.

If there is a forecast breach of financial covenant, which would entitle a lender to accelerate the debt, this may mean that the auditors will not sign off the accounts unless there is a written waiver of that potential breach or an amendment of the covenant from the lender. This all takes time, so – as above – involve your lenders early.

5. Create a dialogue with OfS

The OfS has been clear that it is the obligation of Providers to notify them of any material changes in financial performance. The OfS has also indicated that they are more likely to intervene if they find out about a possible breach of a condition of registration through other sources than the affected university. If there is a forecast breach of financial covenant, or an issue with the going concern statement, consider whether this is a ‘reportable event’ and start a dialogue with the OfS.

6.  Take minutes

Ensure that all decisions at Governing Body, or Sub-Committee level, are fully minuted. It may be important to be able to demonstrate in the future that when a decision was made the decision-makers considered all necessary matters and fully understood the implications of what was being decided.

Sarah Seed is a Partner at Mills & Reeve. Sarah led the workshop ‘Maintaining financial resilience in uncertain times’ at AHUA Autumn Conference 2019. 

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