February 12, 2015

The higher education sector: A new borrower in the market

Government funding for new infrastructure in the higher education sector has recently dried up. As a result, a number of universities are accessing capital markets and bank loans for their infrastructure financing needs – in turn offering significant opportunities for debt providers.

Low nominal interest rates and strong credit ratings combined with Basel III rules are making it attractive for Universities to borrow from capital markets.

Historically, the Australian higher education institutions have relied on funding from government to provide new facilities. However, recently, government funding for new infrastructure has dried up. As a result, a number of universities have accessed capital markets and bank loans for their infrastructure financing needs. And in recent times, NAB has been arranger of three of the last four public debt issues to Australian universities including Universities of Wollongong, Sydney and Melbourne.

Simultaneously, the higher education sector is experiencing a period of substantial change, increased competition and a desire by vice chancellors to ensure their institutions prosper by offering the facilities and experiences expected by students now and in the future.

Some aspects of the federal budget supported by the sector, including fee deregulation, will have an untested impact on the sector; while the demise of the Higher Education Endowment Fund has withdrawn A$500 million (annually) of funding for capital expenditure from the sector has had an immediate negative impact on funding available for capital works.

An educational arms race

In this environment universities are engaged in an educational arms race with the primary weapon being new and improved buildings and facilities. The arsenal includes specialised research facilities used to attract world renowned academics, the best students, research funding and philanthropic contributions. Universities are also building student accommodation facilities to provide students with “a first year experience” on campus as a cornerstone of their offering.

Universities are also progressing “self-funded debt” opportunities – these include building and letting buildings to external tenants, creating business parks and other commercial precincts.

Universities are generally lowly geared and highly rated, benefitting from support and strong links to government making them attractive candidates for lenders.

Opportunities exist in the market

Given the growing funding opportunities combined with low credit risk, a significant opportunity exists for debt providers to the sector.

Sydney University (Aa1 Moody’s) approached the market in April and priced a debut $200 million seven year transaction at swap plus 88 basis points. Demand for the issue was strong and the book built to over $600 million in the space of three hours.

Melbourne University (AA+ S&P) followed in June and priced a debut $250 million seven year transaction at swap plus 80 basis points. Demand for the issue exceeded expectations at $750 million despite the tight pricing. Monash University (NAIC-1) has earned the distinction of being the first Australian University to borrow in the offshore markets. In November Monash priced a debut A$150 million (equivalent) twenty-five year US private placement at UST plus 120 basis points. The placement was heavily oversubscribed by investors with bids received in excess of 3 times the volume sought (at the clearing spread).

As a leading lender to the higher education sector as well as a market leading debt capital markets house in Australia, NAB has a team of specialists that can develop funding and investment solutions for businesses and investors.

This article was first published in “2014 Year in Review: Capital Financing”. For more articles, download the full report.

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