Emergence University Bonds Market


Higher education is the new frontier for the bond market. There is an increasing number of universities across the world raising bonds to finance debt or investment. $ 2.2 billion value of bonds issued by education providers worldwide in 2007. There is an increasing trend in the raising of bonds when one looks at the statistics of the year 2017. $6.4bn value of bonds issued by education providers worldwide in 2017. Bond issuance by universities is only a tiny part of the global bond market, but sales by universities worldwide are more than double full-year 2019 levels at $11.4 billion in the year to date, Dealogic data shows. In comparison, global debt issuance by companies is at around 75% of 2019 volumes, based on Dealogic data. The Covid- 19 crisis is threatening the higher education sector in the world as the physical classes have been moved to online classes. But the economic fallout has hit the finances of universities as tuition fees, especially from overseas students, is likely to fall while funding from governments could be hard.

Global Higher Education Bonds by Universities

Some of the US universities including MIT, Stanford, Harvard, Yale, Princeton and many are raising the bonds. In most cases, the money is spent on brick-and-mortar operations, from student residences to football stadiums and libraries: US universities spent a record $11.5bn on construction in the 2015-16 academic year. Many institutions hope to tap into the opportunities that come with globalization; to lure international students, they invest in flashy dormitories or even campuses based abroad. Laureate Education, a multinational education provider and the top education bond issuer globally, has campuses and online programmes in 23 countries and plans to expand its operations further. The majority of US universities opt for municipal bonds, a financial vehicle traditionally preferred by US states or cities. The benefits are immense for institutions with an eye on the future rather than short-term profit (World Finance, 2018). Municipal bonds owe a lower cost of capital and wide market expansion. The long-term fixed- rate bonds remove the risk of increasing costs. As for investors, they choose municipal bonds as these bonds have low risk and a crucial asset in times of increasing volatility in the bond markets of the US. Universities have benefitted from the bonds as it has low interest rates, which allow the university to lock in long-term debt at attractive rates. The Californian University borrowed $445m from the bond market in the aftermath of the financial crisis to rebuild its American football stadium. The plan overestimated the number of supporters the stadium could attract and the quality of football the university’s team could play, falling short by $120m. Eventually the institution was forced to plug the financial gap with campus funds, including student fees.

The British universities, raising funds through bonds are in demand and steadily growing. Top UK universities are issuing bonds to fund innovative new projects. This investment is expected to enhance their capacity to recruit more students, cementing their attractiveness for investors in a virtuous circle. But universities at the lower end of the league table will not be so attractive to bond investors and so are unlikely to fare so well at a time of mounting challenges. Forthcoming regulation in the UK will also mean that measures of teaching quality and employment prospects after university will lead to formal tiering, whilst demonstrable efforts towards enhancing access and inclusion will also be required. This in turn may provide greater differentiation, highlighting those institutions which offer a truly 'value-added' service using a more holistic approach. The UK is likely to lose access to the EU's university research funding budget because of Brexit. If the government does not plug the gap, this will have a significant impact. EU research funding generated more than £1.86bn for the UK economy in 2014-15 and supports 19,054 jobs. About 15% of research funding for UK universities comes from the EU. Some universities take a large proportion of their research grants from the EU. For instance, the London School of Economics takes 36%, Newcastle 32% and King's College London 25% to 30%. UK universities receive more EU funding than their EU peers; 15.5% of overall funding. The loss of this money would mean researchers are likely to look to non-UK academic institutions to house their future projects (Guillaume Langellier, 2017). The bond market for the UK education sector increased tenfold from £272m ($380m) in a single deal in 2007 to £2.4bn ($3.3bn) last year. As in the US, government funding for higher education has dropped by more than 30 percent since the financial crisis, pushing higher education institutions to consider alternative options (Dealogic Data). Since the UK higher education is highly regulated, the leading universities of the UK have deemed credible borrowers and can afford to offer long maturities.

When it comes to other countries, Australian universities are highly competitive. The Australian Government wind up with its Education Investment Funds pushed the public body funding teaching and research, forcing universities to consider alternative financing options. Bond issuance has increased from just $41m in 2008 to more than $1bn in 2016, according to data by Dealogic. Australian Universities are exploring new areas in the bond market such as green bonds that finance green projects. University of Melbourne issued $250m bonds in 2014 to build student housing facilities and renovate the existing ones. The University of Melbourne more than doubled the size of a seven-year medium-term bond offering to raise 250 million Australian dollars (US$234 million) this week. Its bond sale followed one by the University of Sydney, which raised a $200 million in April, also by issuing notes with a seven-year maturity.

The institutions are scrambling to raise money to improve their campuses, partly to compete with U.S. and U.K. colleges for overseas students from places such as China and India. Melbourne was only the third major Australian university to issue bonds since 2010, when Macquarie University, based in Sydney, offered debt with a 10-year maturity. Canberra's Australian University and the University of Wollongong have visited the bond market in the past (The Wall Street Journal, 2014).

Quality Education India Development Impact Bond

India is also not behind in issuing educational bonds. The Quality Education India DIB was launched in 2018 with the Indian government in Delhi and at the United Nations General Assembly in New York. The innovative Quality Education India Development Impact Bond (QEI- DIB) was launched in 2018 with a focus on improving learning outcomes. Over 4 years, the program will cover 200,000+ primary school children studying in government and low-fee private schools. The QEI-DIB will also help identify education programs that can be successfully scaled and generate evidence to shape philanthropic and budgetary allocation in future years. Since 2018, QEI-DIB has supported over 100,000 children in more than 600 schools across Delhi, Gujrat, Maharashtra and Uttar Pradesh. The governance of the QEI-DIB is led by a Steering Committee composed of British Asian Trust, the Michael & Susan Dell Foundation, and UBS Optimus Foundation. Other partners include Comic Relief, the UK Government’s Department for International Development (DFID), the Mittal Foundation, BT, the Lawrence Ellison Foundation and Tata Trusts. The QEI-DIB is a four-year program from 2018 till mid-2022. The structure of QEI-DIB is a result-based finance mechanism, where the outcome funders only pay for successful results. If the outcomes are not fully achieved, outcome funders will pay proportionate to the results which are achieved (Quality Education India, August, 2020).

Impact bonds in Education are creating its impact effectively which require scaling up. Overall, this is achieving two to three times of its target and some partners are out-performing up to four to five times.

Dr Jayashri S Patil
Honorary council member- India Education Forum
Head Research and Innovation- Teamlease Services Ltd.