High

Education

Increased operating costs mean liquidity issues remain tight at many institutions, which in turn is putting pressure on covenants.

Sector trends & challenges

  • Costs and margin pressure

    Operational costs have increased from having to manage COVID-secure accommodation and essential student services. In addition, international demand in 2021 may be constrained, limiting revenue and impacting margins.

  • Student numbers

    The impact of COVID-19 on overall graduate intake was less than expected, with limitations on place deferrals supporting student numbers. The move to online tuition has been broadly successful, but 2021/22 intake may reduce.

  • Covenant pressure

    Increased operating costs mean liquidity issues remain tight at many institutions, which in turn is putting pressure on covenants. Increasing caution and selectivity is being seen among bank and non-bank lenders.

Sector rating profile

Our focus on the Education sector is primarily directed at Higher and Further Education institutes, although we also see restructuring activity in Independent Schools periodically. We have observed a marked increase in the level of restructuring activity in the sector in the last two years driven by a number of issues such as pension deficits, teaching talent shortfalls and reduction in lending appetite to the sector. Undoubtedly the pandemic raised the pressure on the sector quite materially and both cost and liquidity are now established as priority issues. We did not however quite see the level of acute distress many anticipated and have largely been engaged in supporting multiple clients in the sector improve their financial resilience.

Education

The impact of COVID-19 on overall graduate intake was less severe than expected, with limitations on place deferrals supporting student numbers. The crisis initially foreseen by the pandemic did not materialise on the back of the move to online tuition being broadly successful. Any impact on the 2021/2022 intake is still currently unclear, however there remains areas of significant stress across Higher and Further education that were already in financial difficulty pre-COVID.

Increased operating costs associated with remote learning mean liquidity issues remain tight at many institutions, which in turn is putting pressure on covenants. Operational costs have also increased from having to manage COVID-secure accommodation and essential student services. In addition, international demand in 2021 may be constrained. UK universities with international campuses may benefit from geographical presence and be able to mitigate this challenge better than others. The experience of the 2020 intake may encourage the 2021 intake to defer until the COVID-19 situation clears. We foresee capex spend to remain restricted for some time yet.

The insolvency of a higher education institution is untested and would be both risky and complicated. As such, both universities and colleges need to seek urgent financial advice to maintain financial resilience.

As a mitigator to covenant pressure, increased use and acceptance of virtual learning may help institutions divest of real estate and reduce overheads, though the impact is likely to be limited.

Students are demanding more flexible and affordable study options, with new technologies disrupting traditional teaching models. IT infrastructure is essential to maintain virtual studies and investment may be required if current capacity and systems are inadequate. The real challenge comes with teaching that requires a physical presence and practical lessons, such as with physical sciences and medicine.

Key issues such as pension contributions and EU talent availability have also gained the attention of the lending community. We have noted a gradual tightening of credit amongst both bank and non-bank lenders, which adds yet further challenges to certain UK universities right now.

Find Your Expert

Andrew Burn leads the Education sector for Interpath nationally, supported by Gareth Pratt. For a full list of our senior people with experience in this sector use the button below.

Our senior team