Oxford bond debut success shows UK universities another course

LONDON - 17 December 2017: The success of Oxford University’s $1 billion bond, the first in its 1,000-year history, is good news for Britain’s top academic institutions at a time of anxiety over Brexit-related funding shortfalls and calls to scrap student tuition fees.

The 100-year bond, launched on Dec. 1 with a 2.5 percent coupon, has taken the market for deals for UK universities and colleges to a new level on a par with such big U.S. names as Harvard and Yale.

Technically, the bond was the biggest from any university in the world. Buying interest equaled $2 billion or double its face value.

The day after its launch, it was among the top 20 traded issues in the whole of Europe, according to Trax, a subsidiary of debt trading platform MarketAxess.

That is cause for celebration for peers contemplating bond sales, even if their credit scores are less impressive than Oxford’s gold-plated triple-A rating. The oldest university in the English-speaking world, Oxford topped a global ranking by the Times newspaper for the first time last year.

It’s an uncertain time for Britain’s academic institutions.

The cost of student tuition fees, which make up almost half of UK universities’ revenues, has been catapulted to the top of the political agenda by young voters who deserted Britain’s ruling Conservative party in a snap election in June.

Universities expect these fees - currently 9,250 pounds ($12,424) a year - to be reviewed in the new year, meaning they are unlikely to rise further and could even be cut.

“I think the whole higher education sector is worried about the debate around tuition fees,” Oxford’s Pro-Vice-Chancellor for planning and resources David Prout told Reuters after the bond sale earlier this month.

Britain’s plan to leave the European Union in March 2019 is also weighing heavily.

UK universities are already finding it harder to attract and retain EU-born students and staff, with official figures showing undergraduate course applications from EU students fell 7 percent this year.

The other countries in the EU send around 58,000 students, or 8 percent of undergraduates and 15 percent of postgraduate students, to the ‘Russell Group’ comprising 24 top tier universities in the United Kingdom. Around 25,000 of their staff come from other EU countries, too.

Once Britain leaves, these institutions could also lose their places on EU-funded research projects after 2020.

A big worry is how Brexit will affect the UK’s ability to borrow from the European Investment Bank, UK universities’ biggest source of lending.

The bank, the European Union’s main development lender, stopped support in March after London triggered the Article 50 clause to formally start the EU withdrawal process.

LEARNING THE CURVE

Some 36 British universities, including University College London, Edinburgh, Swansea, Bangor, Newcastle and Oxford, have borrowed almost 3 billion euros ($3.52 billion) from the EIB over the last decade to fund campus upgrades.

That’s more than any other country and almost double the 1.7 billion that went to Germany and 1.5 billion to France.

Last year alone, the EIB lent 671 million euros (590.21 million pounds) to UK universities.

But unless EU treaties are amended, Britain will have to leave the EIB after Brexit.

“This (EIB funding) is an area where people (at universities) feel there might be changes, so they are looking at the option of the public and private placement markets,” said Dominic Kerr, manager director of Debt Capital Markets for HSBC.

Kerr has helped launch seven of the eight public bonds that have so far been issued by UK universities, including the first by Cambridge in 2012.

Kerr estimates there have been around 50 market-based funding deals for UK universities and individual colleges in total if ‘private placements’ - bonds offered directly to a just one or a few investors - are included.

Fraser Dixon, JP Morgan’s executive director for UK & Ireland debt Capital Markets, said he had several interested calls after his bank arranged the Oxford bond.

“Having seen what is able to be achieved in the markets and with the EIB possibly disappearing as an option, I think other institutions will be considering their options,” Dixon said.

“The bond markets are offering greater capacity and longer-dated money than the EIB traditionally has.”

Many still hope EIB funding will not vanish altogether.

An EU-UK ‘divorce deal’ outline published last week specifically stated: “The UK considers that there could be mutual benefit from a continuing arrangement between the UK and the EIB,” and that it wanted to “explore” the possibilities.

The EIB does lend to non-EU universities in countries such as Morocco and Tunisia and the group is mulling an offshoot that would include the UK, sources have told Reuters.

“Looking ahead, if there were to be clarity on the future relationship with the UK, let’s see, but from our side we would happily look at supporting higher education in the years ahead,” an EIB source said.