This guest blog has been kindly contributed by Andrew Connors, Head of Higher Education at Lloyds Banking Group.
It does not seem very long ago that those involved in the higher education sector talked about the perfect storm. The colliding forces were a consistent decline in the number of 18-year-olds in the UK, turbulence surrounding Brexit and the resulting potential impact on the number of EU students alongside the policy challenges of a minority government.
As we entered 2020, however, if felt like the sector was weathering that storm with a majority government, certainty around the UK’s withdrawal from the EU and the number of UK 18-year-olds forecast to start growing again from 2021.
All this has changed due to the impact of Covid-19, which has felt less like a perfect storm and more like a tsunami hitting the sector.
Over a dynamic and fast-moving few weeks, higher education institutions have sent students home, moved to online tuition and, as the short and medium-term implications of Covid-19 become clearer, they have been assessing their immediate and ongoing liquidity requirements. The discussions we have been having at Lloyds Bank with institutions up and down the country suggest that a great wave of liquidity is likely to be necessary to support institutions through these most challenging of times.
The UK’s higher education institutions are, though, facing into different challenges to much of the rest of UK Plc. Many sectors have been hit immediately and extremely hard by Covid-19 with trading halted and businesses closed overnight, necessitating workforce redundancies or furloughing.
All UK banks are dealing with a significant and urgent volume of liquidity requests from their customers, the likes of which we have never seen before. To help meet these challenges the Government has made dramatic interventions to support companies in the form of the Job Retention Scheme (JRS), the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Corporate Financing Facility (CCFF) and now the pending launch of the Coronavirus Large Business Interruption Loan Scheme (CLBILS)
I worked through the financial crisis of 2007/08 and it does not compare in my experience to what we are witnessing now – this crisis has touched everybody in some shape or form and many previously viable businesses are now in a fight for survival.
The dynamics in the higher education sector are different to a lot of UK Plc. At Lloyds Bank we have not seen urgent requests for liquidity from the sector over recent weeks and nor would we expect to have given the crisis timeline looks very different to the one a large portion of companies are facing into.
Yet, while the immediate impact we are seeing in the sector is slower, the overall impact of Covid-19 is potentially deeper and longer. The cost of lost commercial contracts in the summer alone is believed to be approaching £600 million and, as we look towards the 2020/21 academic year, annualised international student fee income of around £6 billion is at risk.
Over the last few weeks, we have had many conversations with higher education institutions who know they will have a significant reduction in income over the summer term and are scenario planning potentially dramatic reductions in international students for 2020/21. That simply would not have been imagined a few short weeks ago.
The discussions we are having suggest impacts on the current financial year that range from minimal to tens of millions of pounds for some institutions. Significant lost income has come from the waiving of accommodation fees for students for the summer term while many are committed to nomination agreements with other accommodation providers. Catering income alongside hotel and conferencing facility income have disappeared, with no expectation that summer schools will take place. This is likely to lead to some immediate cashflow implications for some, who will be carefully reviewing the Office for Students’ recent guidance around new reportable events, including the new short-term financial risk reporting requirement around the need for thirty days’ liquidity.
As we look into the next academic year, the most significant concern is that potentially dramatic drop in international students. Many institutions are modelling reductions of between 80% and 100% in international student numbers. Every university we have spoken to expects to be impacted and for some the potential loss to income is projected to be greater than £100 million. And that is before you factor in that losing new students has a multi-year impact.
Banks and Funding
It is not surprising, therefore, that all universities are urgently looking at their short and medium-term liquidity needs. These discussions at Lloyds Bank have fallen into three buckets:
- Those looking to access one of the government schemes.
- Those looking for medium-term funding from their banks – most commonly three to five-year revolving credit facilities.
- Those looking to secure longer-term funding – through their banks – or more commonly the bond or private placement markets although this is less common at this time.
Fortunately, given the wave of liquidity discussions we (and other banks) are having, the banks enter this crisis having transformed their balance sheets from 2007/08 driven by lessons learned and underlined by EU and government regulation.
The banks have done this by repairing capital and liquidity ratios, transforming their loan to deposit ratios and significantly increasing their liquid assets. All this means that there should be plenty of liquidity available for UK Plc – and that is before adding in the recent cancellation of bank dividends and the impact of the Bank of England’s new term funding scheme.
Given the significance of the higher education sector to the UK economy and its world-class track record, I would expect the sector to be able to access liquidity where needed. At Lloyds Bank our stated purpose is to ‘Help Britain Prosper’ and that’s just what we’re working to do with this sector.
What of the Government schemes? While the Government have, to date, made no specific announcements around support for the higher education sector, there are no obvious exclusions within the already announced schemes.
To access the CCFF, for example, the Bank of England sets out the need to make a material contribution to the UK economy as being essential for access. At Lloyds we have been signposting those clients who wish to discuss access to the CCFF to the Bank of England. This has included confirming their Investment Grade credit rating, which is key to accessing the scheme.
The newly-announced CLBILS scheme, likely to launch around the 20 April, could also be a real support to smaller higher education institutions who have a need for under £25 million of liquidity repayable over the medium term at preferential rates.
We know a number of universities that are already using the Job Retention Scheme to furlough colleagues – particularly those with hotel and conferencing facilities.
Given the potential wave of support needed, it is clear that both the Government and financial sector have critical roles to play. For those like me with long memories, I have been reflecting on some lessons I learned from the actions the best companies took during the financial crisis of 2007/08 which I would sum up in the phrase: plan for the worst and hope for the best. That philosophy should lead to the following critical actions:
- Ensure you have timely and good quality financial information, including forecasts which should include a worst-case scenario alongside your base case. The test is to ask yourself, what would be the most severe outcome in every situation?
- Ensure you have sufficient liquidity in place to meet the downside risks.
- Seek professional advice where necessary.
- Be relentlessly challenging on expenditure and costs.
- At these times, you cannot over-communicate to colleagues and other key stakeholders, including your advisors and funders. Ensure your funders are invested in your institution and on the journey with you.
- And finally, some companies thrived during the financial crisis because, of course, even in the toughest of times there is opportunity. Be open to the opportunity to transform your operating model, to grow your people and to future proof your institution.
There is no doubt that, by the time this Covid-19 outbreak is over, it will have had a significant impact – on individuals, on businesses and on society. But there is clear guidance and support available and never before in peacetime has it been truer that we are all in this together. For universities and businesses more generally, there is great commitment from government and lenders to do everything we can to help you navigate through the interruptions.
We will get through this and, for those that need it, support is available to ensure higher education institutions emerge healthy.