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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. 3935 Continued on next page > 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] 3935 Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012. www.pinsentmasons.com