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Banks ‘walk away’ from college sector

Further education colleges struggle to secure loans and financial support from banking sector after change in legislation increases risk

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Further education colleges struggle to secure loans and financial support from banking sector after change in legislation increases risk

Banks have largely “walked away” from the college sector, experts have warned. They said the introduction of a new insolvency regime, together with the area review-led reform of colleges and financial difficulties they face, have resulted in providers being deemed a “risky proposition”.

This makes it more difficult and more costly for institutions to borrow – and leaving them increasingly reliant on the government for funding.

Ahead of the autumn budget, the Association of Colleges (AoC) warned that colleges were facing a “homegrown credit crunch”, with total borrowing having dropped from £1.6 billion in 2014 to £1.3 billion this summer – and signs suggesting it is “falling further”.

It pointed out that the main two lenders – Barclays and Lloyds, which in 2014 accounted for 90 per cent of college loans – were “taking steps to reduce their exposure”, while Santander was offering “very limited” new lending. This, the report said, had led to “higher interest margins and tougher covenants”.

Lender of last resort

Julian Gravatt, AoC deputy chief executive, told Tes the prospect of the new insolvency regime has “made the banks even more nervous”, resulting in colleges increasingly relying on the government as the “lender of last resort”.

“What we have had is a significant cut in new capital expenditure, because all the people that used to fund capital expenditure [both government and the banks] have stopped doing that,” said Gravatt.

Several sources told Tes that college mergers faced lengthy delays and disruptions as a result of banks looking to change terms and conditions for loans.

“Banks now have to make more they might be trying to get out of their college loans and charge more,” Gravatt said.

'Risky proposition'

In August, East Coast College was created from a merger between Great Yarmouth and Lowestoft colleges. Principal Stuart Rimmer said that while the bank behind the new college had been “incredibly supportive”, elsewhere banks were “feeling exposed to a lot of debt in the sector”.

“The FE sector is increasingly seen as a risky proposition,” he added. “That is also reflected in terms of securities taken and covenants set within any loan. We saw a change in conditions: there was a much greater focus, rather than on overall levels of borrowing, on debt serviceability and cash generation.”

A spokesman for Lloyds Banking Group said it is “continuing to support the sector through our existing lending commitments”.

A Barclays spokesman said it “continues to be a significant long-term supporter of the further education sector, providing funding and relationship banking to almost half of the country’s colleges.”

And a spokeswoman for Santander said that it had not “made any changes to the terms of the loans with FE colleges since we first started lending to them in 2008”, and was “still active in this space”.

This is an edited version of an article in the 8 December edition of Tes. Subscribers can read the full story hereTo subscribe, click hereTo download the digital edition, Android users can click here and iOS users can click hereTes magazine is available at all good newsagents.

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