Being set up to fail? The battle to save the UK’s Universities from speculative finance

by | 16 Mar 2018

The sickening foliage of ‘Golden Autumn’ by Alberts Filka (1931-37)

When Sam Gyimah announced a traffic light rating system for universities this week many poured scorn on the ineptness of the attempt to classify higher education by a simplified metric drawn, no doubt, from Mr Gyimah’s previous life as an investment banker. Yet the analogy does not appear so inapt if we consider rather that the intention is to present the academic wearer of this ill-fitting suit much like Joe Gargery in Great Expectations – as a human out of place in the proper clothing.

It appears that universities are being geared up not just for financialisation – a process already well underway – but for failure. As Philip Hales has written for FT’s Alphaville blog, HM Government are actually pursuing a world in which higher education institutions can collapse into insolvency. And to ease this passage the Government is more than happy to hand university Vice-Chancellors all the rope they could ever want.

The current UCU pensions strike is taking place amid wider fears over the direction of UK universities, and a more than nagging doubt that a real risk of university insolvency could lead to restructuring, redundancies, private equity ‘rescues’, and the kind of pre-packaged administration in which a ‘bad-university’ is split off, taking pension liabilities with it, and dissolved.

The increasing rate of university financialisation, apparently with limited regard to its sustainability, makes this all the more likely.

Take, for example, the announcement this month that the University of Portsmouth has privately placed £100m of its debt with US financial institutions, a deal arranged by Lloyds. Private placement as a mode of financing has the potential to be highly problematic, not least because of its relatively secretive and unregulated nature – hence the name. We simply do not know what Portsmouth has signed up to (though I could make a few learned guesses). Private placement exists on the boundary between banking and shadow-banking partly because of the private nature of the transaction, partly because the ultimate lenders tend to be non-banks. Due to the inadequacies of funds regulation in Europe these non-banks tend to operate from the US or Asia, beyond the oversight and guidance of EU regulators. Partly as a result of such regulatory arbitrage – the benefiting from differences in financial rules – private placement has grown massively in recent years: it is the next big thing, just as regulators are focused on big banks. This opacity has already proved problematic: when Carillion collapsed at the start of this year it was noted that, unable to borrow openly, management had used private placement debt to keep going, thereby, shall we say, modifying creditors’ appreciation of just how dire the business’ situation was.

The Financial Times reports that some £3bn has been borrowed by UK universities since 2016, over half of this in the form of private placements. Portsmouth’s own borrowing was stated to be for the purpose of a first phase of ‘estate development’. It is expected to involve a number of buildings, including an indoor sports facility, the extension of a lecture hall, and a flagship ‘teaching and learning building’ presumably along the lines of Warwick’s new Oculus Building.

As with any borrowing the question of repayment is central. The safest way to proceed is to be certain that the capital invested in will over the course of its life generate revenues that will pay down the debt. More often than not, however, income will service debt and when repayment falls due the debtor will refinance by borrowing new funds. This takes the risk that such funds will be forthcoming in the future. The most speculative stance is to be aware that refinancing costs will exceed the current borrowings, but to borrow anyway in the hope that the underlying assets increase in value and/or credit conditions become looser. The latter investment posture arises particularly in bubble conditions.

In the university context advisors appear to be modelling university ‘business’ on the basis of future student fee income, and today’s capital expenditure – shiny buildings – is to be paid down by future students. Thus, money is borrowed, buildings are built, and debt is serviced and ultimately repaid over several years by a relatively constant stream of students. At least in principle.

The recent history of university financialisation, however, suggests that management are undertaking debt transactions which verge on the speculative, and developments of the last decade or so suggest that things will not end well.

UCL is a case in point. UCL management borrowed £280m from the European Investment Bank for the purposes of a huge real estate capital expenditure plan focused on land near the former Olympic Stadium in East London. As with the Portsmouth private placement, the debt was to be paid down by student fees. Part of the problem seems to have been that UCL management allegedly fell into the error that simply building new facilities would generate the necessary student income, the university having already seen a doubling of 19,000 to 40,000+ students in a decade

The Financial Times reported in 2016, that in a meeting of more than 200 academics at UCL’s Darwin lecture theatre, the Provost Professor Michael Arthur had openly stated that the university’s budget was under strain:

There is not a world-class institution anywhere in the world in the top 50 that is not financially sustainable. We are barely financially sustainable.

We have 42 days of expenditure in the bank. So, if all the money stops, we cannot pay your salaries in 42 days’ time. That is not a sufficient surplus for a financially sustainable institution. These are things that have to be dealt with.

At a February 2018 UCL meeting at which a vote of no-confidence in management was passed, Vice-Provost Rex Knight stated that UCL now had little choice but expand further, telling the meeting:

We’ve done some modelling about what it would look like at 20,000 [students] or 30,000 students, and the consequences of that were pretty appalling.

It is unclear where these students will come from in a market where all the leading institutions are expanding heavily to tread water. It seems that VCs have been sold magic beans by consultants interested in immediate commissions and bonuses, not the long-term viability of the organisations they advise. If the valuations by USS and UUK of its pension liabilities are anything to go by – they were roundly condemned by leading mathematicians such as Jane Hutton for being based on patently erroneous assumptions – then we can have little faith in these financial plans. If this sounds like 2007 all over again, it should.

It must be understood that university insolvency is not an unforeseen consequence of this financialisation of the academy; in fact, the Financial Times claims that the UK Government is actively promoting the idea as it further marketises the sector. It now seems clear that it is the Government’s aim to introduce the possibility of the failure of higher education institutions.

Against this background the recent proposal by Universities Minister Sam Gyimah MP that ratings be introduced into the universities sector seem less of a flight of fancy from someone recently over-promoted to the job. Universities are being constructed as their student income streams, and in this they are as financialisable as any other corporate vehicle with a relatively stable income stream. A university can enter capital markets because it can issue notes (bonds) that represent this income stream – in effect universities are becoming securitization vehicles that parallel the real securitization of student debt that occurred in December 2017. If a university can issue notes then ‘of course’ it can be rated, and while Gyimah speaks of traffic lights, he has in mind the more traditional ciphers of AAA and B-.

As Philip Hales has argued, rating leads very quickly to a financial backwash. One may begin with an income stream which can leverage borrowing, but as UCL has discovered this quickly turns into borrowing that demands a growing income stream. In order to borrow in the first place, the university has ‘got in shape’; it has presented itself as a disciplined participant in the capital markets. Soon the market has developed a standard way of rating the discipline of the borrower, and can then compare universities by this metric. If one university falls behind then the market may refuse to lend, or only lend at higher rates of interest representing greater speculative risk. The university may have assumed that it could refinance its debts in the future, but the market has turned and that money is not forthcoming. The university must do more to satisfy market discipline – a round of ‘rationalisation’ perhaps (redundancies); a cut to the pension plan. And if this does not work, then default, and so insolvency beckons.

The current strikes take place against these real fears by university staff. Speculative manias are remarkable for how obvious they are to non-participants, and striking lecturers and other workers regard the current ‘boom’ at universities with appropriate concern. By striking they are trying to save universities from themselves, or at least an image of themselves that is being encouraged by bad influences in City and Government.


  1. Absolutely correct. The only thing missing in this analysis is that interest rates are increasing and debt will be more expensive

    • Hi Elizabeth,

      With near record low base rates one can expect the interest rates on any floating rate loans/notes to rise. The question is how universities have prepared for this (if at all)?

      Having reviewed Warwick’s public accounts, for example, I note that Warwick has put in place an interest rate swap, the potential liability under which is valued at £50m.

      I expect other uni’s with loan agreements to have these too, as banks are very keen to push hedging products whenever possible.

      A sub-question is: are unis only hedging their LMA-style loans or also any floating rate note issues? These documents are not public so I cannot say.

      Kind regards,



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