NOTE to investors: colleges are financially safer than houses, but not as safe as banks. In other words, there is less risk involved in lending money to colleges than to house-buyers.
This is the conclusion of a report by Standard amp; Poor's, a leading credit rating agencies, who were asked to undertake a credit analysis of colleges by the Further Education Funding Council. The sector currently has borrowings of pound;250 million - mostly in the form of bank loans.
The agency pinpointed a number of credit weaknesses which would deter future investors. These included tight operating margins with negligible surpluses; significant recent forced cutbacks; significant volatility in student numbers; and the uncertain impact of more competition from private training providers.
But set against this there is strong government support for the sector; a statutory requirement to provide FE to a local population; robust student demand; strong regulation and low debt levels.
On a purely financial stand-alone basis, even reasonably robust colleges would be rated as a poor investment. But factors such as governmnt support, relatively stable funding and strong regulation by the FEFC, boost their credit rating. Action by the funding council over eight years has ensured that no college has ever gone bust. Most colleges, therefore, are likely to be worthy of investment, although it is unlikely they would be in a high investment category. But financially weak colleges, around 60 at present, would not be worth investing in.
Broadly speaking, the financial performance of sixth-form colleges is above average. Below average come agricultural colleges which have had to adapt to lower funding levels.
The sector should not be sanguine. The agency warns that when the Learning and Skills Council comes into operation and funding for training all comes from one source, colleges may face stronger competition from private training companies for industry contracts.
Financial health warning: this report does not constitute a recommendation to buy, hold, or sell securities. David Melville, chief executive of the funding council, said the report should provide "comfort" both to colleges, and to prospective lenders.