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New trend: universities borrow for face-lifting changes to attract mobile students?

To be attractive and competitive today in the world of higher education is to have a beautiful campus and to promise a comfortable student life that not every university can afford. Funding for capital projects is, however, often the first to suffer a cut when a national government slashes its higher education budget. While some universities may still have the ability to raise funds from alumni/philanthropic sources to finance ambitious face-lifting exercises during an economic downturn, others have to turn to loans from the banks or the capital market.

In July 2012, De Montfort University (DMU), a post-1992 English university, made a splash in European higher education news with its historic plunge into the capital market. It managed to borrow GBP 90 million from four lenders in the capital market via a 30-year bond at a fixed interest rate of 5.375% per annum. The loans will be used for various capital projects to upgrade the teaching and leisure facilities on campus, which is described as a “massive boost to student experience”.

DMU’s move was closely watched because it was the first public bond issue by a United Kingdom (UK) university since 1998 and it reveals an alternative funding source that European universities are hesitant to tap into. It is considered ‘radical’ among its peers. Ironically, the investors and rating agency Moody’s see more the ‘stability’ in the ‘business model’ of the university. Despite the deficit of 2.3% in the financial year 2010 recorded for the first time in DMU’s financial track record, Moody’s assigned DMU its second-highest credit rating – Aa1 – for the bond issue, based on the “strong regulatory framework for English universities and a very high likelihood of extraordinary support from the UK government”.

The vote of confidence by the rating agency and the Higher Education Funding Council for England (HEFCE) which gave the green light for DMU to issue the bond signalled a highly secured investment option for the investors.  However, as an observer, one might want to ask how secure is the position of DMU, and the UK’s higher education sector as a whole, in the global higher education market today. The student fee hikes and the uncertainties surrounding the visa regulations in the UK have already impacted the reputation of UK higher education in its source countries in Asia and given ideas to its competitors, such as Canada (see ACA Newsletter – Education Europe, August 2012). To make up for the lost reputation and to counter the negative image of over-priced education, UK universities would need more than a beautiful campus to attract and retain their increasingly mobile clients.

De Montfort University (press release)