Download University Bond Issues: An Alternative Source of

University Bond Issues: An
Alternative Source of Finance
November 2012
In today’s credit-starved market, traditional credit providers are generally unwilling to provide long term
finance. This reluctance, coupled with funding cuts, has resulted in universities finding it increasingly
difficult to obtain new sources of finance. One potential solution to this problem could lie in the raising of
funds through the issue of a bond. This article explains the potential benefits of bond issues for universities
and provides a brief summary of the bond issue process.
The Benefits
For the right issuer, raising funds by way of a bond issue has rarely been as advantageous. Long-term gilt prices are at all time lows. The
coupon – essentially, the interest rate that a university would have to pay to borrow money by way of a bond – is priced in accordance
with these gilt prices. As such, many universities, as entities with strong reputations and finances, will be able to borrow money at low
rates and for significantly longer periods of time.
Issuing a bond opens the door to a far wider array of investors. Institutional investors and even individuals ‘lend’ by purchasing debt
securities, leading to lower rates for borrowing and a wider access to credit.
Additionally, for the right issuer, the terms of a bond issue can be less restrictive than under a loan facility agreement. Therefore, a
university will generally have more flexibility and fewer obligations in respect of the issue.
Finally, a bond issue may lead to significant publicity and press coverage for a university. In times of declining student applications,
increasing awareness and public recognition of a university through a bond issue could act as a useful marketing tool.
The Options
There are three main options for a bond issue, these are:
• Publicly traded bonds listed on a recognised stock exchange (for example, the London Stock Exchange). This type of issue focuses on
the wholesale institutional investor market.
• Publicly traded bonds, as above, but focusing on the retail market. This type of issue focuses more specifically on high net worth
individuals and individual investors.
• Privately placed bonds. Either syndicated or bilateral, privately placed bonds specifically target, prior to issue, wholesale institutional investors.
The Process
Listing a debt security on the London Stock Exchange (LSE) is a two-stage process, involving complying with the requirements of two
regulatory authorities, working in parallel. Essentially, compliance is achieved through submitting a prospectus to the UKLA (the FSA’s
UK body for listing) for review and approval, together with any supporting documents required.
Although there are several markets on the LSE where debt securities can be traded, the two main markets are the LSE’s Main Market
and the Professional Securities Market (PSM). The crucial distinction between the two markets relates to the level of disclosure
required. The PSM has a much lower level of disclosure.
The Prospectus
Although prospectuses are not required for all bond issues, for a listed issue, a university will have to submit a prospectus to the UKLA
for approval. The general content requirements of a prospectus will depend on whether the bond issue follows the wholesale or retail
regime - the value of the denomination of the bond will determine this. Nevertheless, a prospectus is likely to include: details of the
university’s governance structure and finances; a summary of the characteristics of the bond itself; and an explanation of how the
university intends to use the proceeds of the bond issue.
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University Bond Issues: An
Alternative Source of Finance
November 2012
Legal Services
Through our debt capital market team, we are able to provide legal advice in respect of the prospectus and other legal documentation
related to the issue. However, for a transaction of this nature, other areas of law come into play, in particular charity law and tax law
advice. Tax advice and planning is an imperative consideration when considering the financial implications of a bond issue. Additionally,
as the majority of universities are charities, our charities team is able to provide guidance on all forms of constitutional review and
governance issues.
Recent Examples
In the last six months alone, both Cambridge University and De Montfort University have entered the bond market with great success.
Cambridge University issued an unsecured listed bond, which is not redeemable until 2052, with a coupon of just 3.75 per cent; long
term finance at a very competitive rate.
In today’s challenging times, universities seeking new sources of credit must surely consider bond issues as an alternative source of financing.
For further information, please contact:
Edward Sunderland
Partner
Financial Institutions & Human Capital,
Banking & Restructuring
T: +44 (0)121 626 5772
M: +44 (0)7881 617774
E: [email protected]
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