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Bank Borrowing - Ducks, Elephants and SONIA

on Friday, 16 March 2018.

Bank borrowing remains a popular and flexible option for universities looking to fund capital projects to enhance the student experience.

Most lending to universities will be of a size where banks will use Loan Market Association (LMA) standard terms and this article assumes the use of such terms, as well as lending by a single lender without syndication options.

Ducks in a Row: Aligning the Timing of Finalising Bank Terms into Project Plans

Once it becomes clear that external funding is required to deliver a capital project, time will spent selecting a preferred bank and negotiating the main commercial terms of the facility, such as pricing, financial covenants, terms, security and an outline of conditions precedent. These will usually be set out in some form of heads of terms.

HEFCE consent is likely to be required in respect of financial commitment thresholds. This should be sought in principle at the outset and then in more detail once agreed heads are available. Typical conditions to consent will include:

  • confirmation that final financial terms are no more onerous or restrictive than as set out in the heads of terms
  • evidence that the university has complied with its governance procedures to approve the loan.

You will also need to consider whether it is necessary to get consent from any prior lenders (which is also likely to be a HEFCE condition), as existing loans are likely to contain a 'negative pledge' that prohibits additional borrowing or security.

The timing of governor or council meetings for approving facility terms in accordance with your constitutional requirements and governance procedures is likely to be key. Many of our university clients tend to hold three or four scheduled meetings during the year, often with a gap during the summer months.

It is clearly in the university's interest to ensure the borrowing is intra vires and it is also crucial to the lender (and to HEFCE). You should check as early as possible with your preferred lender whether it has any specific wording required for meeting minutes. Lenders, or their solicitors, will usually have a prescribed form of words that deal with approval, the delegation of authority to a committee or other designated group that is empowered to agree amendments and execute the final form facility and related security, drawdown requests and to issue borrower certificates on behalf of the university.

The prescribed wording will, of course, need to be checked by your own lawyers (and any law firm required to provide a legal opinion on vires to the lender), but any changes will need to be agreed before the wording is sent out in your governor meeting packs. This requires careful scheduling.

Looking for Elephants: Reviewing Loan Facility Terms

Most loans of any size (£5 million +) will now be offered by banks in facility agreements based on LMA standard terms that are then amended by specific terms dictated by a bank's internal policies and its own higher education specific requirements.

Understandably, banks do not want to amend standard wording, but in our experience they are generally receptive to suggested changes where these are proposed to ensure restrictions do not catch some ordinary course operational activities. The process of obtaining consents after signing can be time consuming and incur costs of approval, so appropriate 'carve outs' negotiated into the agreement can avoid this and mitigate against the risk of you subsequently breaching the contract.

When reviewing the terms of the loan agreement you should consider whether:

  • it reflects what you have agreed in indicative terms.
  • the university can achieve what is being asked for it for drawdown and on an ongoing basis (eg in terms of reporting and communication).
  • there are any restrictions imposed which affect ordinary operating activity. Could you seek dispensation for some types of activity, or agree this up to a financial limit?

In our experience, typical issues encountered by universities include whether:

  • the university can give all the representations it is being asked to give, and will be deemed to give, throughout the life of the loan. Issues such as litigation, changes to subsidiaries and pensions may need to be thought through.
  • the information and financial information undertakings as drafted require the university to present information in a different way to its usual practice.
  • the wording of the financial covenants reflect the way the university presents its accounts.
  • the extensive General Undertakings are not unduly restrictive of ordinary operating activity. A common issue we help to resolve is that of restrictions on acquisitions, joint ventures and subsidiaries, where often carve outs are created in respect of existing situations and to allow future opportunities to be taken forward, subject to annual financial limits.
  • the negative pledge carves out existing security as permitted security. Sometimes it is necessary to examine situations where grants have been received by universities to purchase assets where there are rights of recourse, as these can fall within definitions of 'security'.
  • there is any restriction on giving guarantees. As well as in relation to subsidiaries, many universities will guarantee levels of room occupancy and student rent in third party operated student accommodation.

SONIA (the Daughter of LIBOR…Possibly)

Last summer by Andrew Bailey, Chief Executive of the FCA, announced plans to transition away from LIBOR to alternative reference rates by the end of 2021.

Many universities will have LIBOR linked loan agreements, some of which will still be utilised after 2021.

For the sake of an orderly market the transition will no doubt be carefully handled over time and facility agreement terms amended accordingly, by LMA and others.

For Sterling LIBOR, the FCA is considering SONIA (Sterling Overnight Index Average - an existing rate administered by the Bank of England) as an alternative to LIBOR. University Finance Directors will no doubt keep this on their radar as the solution emerges and amendments to existing terms will be necessary at some point.


For more information please contact a member of our Corporate Law team, or complete the form below.

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