Five key banking considerations for 2021

Our latest blog post comes from Ian Robinson, Head of Public Sector and Education at HSBC. Universities are facing a wide range of challenges, but there are five that need particular consideration...

The last 12 months have been unlike anything we’ve experienced in recent memory. The challenges faced by educational institutions have been truly unprecedented. In response, we’ve witnessed an outstanding level of agility and focus on resilience, liquidity and cost management rarely experienced, or needed, yet delivered with exceptional results.

The sector has evolved and experienced a huge pivot to organisational efficiencies and digital solutions as well as placing increased focus on cost savings and well-being. Flexible working and flexible learning may be a sticking plaster for now, with some benefits here to stay in the longer term but challenges have been created too. The sector is currently faced with another lockdown and the uncertainty that follows yet the UK’s vaccine rollout is driving positive sentiment from international agents. There are also wellbeing challenges, the post-Brexit environment, pensions and increasing calls for refunds, however these are five key banking topics we’re talking to institutions about.

Sustainable finance

It’s no longer enough to simply have a sustainability strategy, stakeholders want to see tangible progress linked to that strategy. We’re increasingly having more conversations with institutions and seeing rising appetite for our suite of sustainable finance facilities, a focus on net-zero, what this means and how to achieve it.  There is clear public and student demand for society to bounce back better from the pandemic and at the heart of that is a focus on improving the world we live in.

Our Green Loans and Sustainability Linked Loans provide a path for an institution to meet their finance requirements whilst supporting their sustainability goals through funding solutions. We expect the education sector to lead the way with these products, given their estate investment which is returning and the focus on research and scientific development.

As universities review their capital expenditure and plan new projects, making sure these plans are fit for purpose in a post-Covid environment is essential. It’s here that sustainable finance can help to fund new structures and projects fit for the future.

Liquidity

Despite the economic uncertainty seen through 2020 the sector has strong levels of liquidity heading into 2021 when the changed SLC profile will start to impact reserves. Many institutions pulled levers to save cash during the first lockdown and despite operational changes, student enrolments continued to allow a sense of normal trading activity much more quickly than many other sectors. In a low interest rate environment, institutions must now decide what to do with this liquidity. Considerations should include asset management, investment funds and ESG solutions such as green deposits. We have seen a continued focus on safety over returns, a need to revisit counterparty limits and treasury policies.

Covenants

This has been an ongoing challenge for institutions both at year end 2019/20 and also looking forward to covenants for 2021. The wider corporate market has seen a reaction to covenant pressures with pricing increases and amended credit terms reflective of the increased risk. HE has been insulated somewhat in that Covid impacted covenants have been waived or amended with little impact to pricing. The challenge posed by auditors, is driven by uncertainty and prudence. Using worst case forecasts to set budgets has resulted in better than expected performance, however the outlook to covenants in some of these worst case scenarios is challenging. The potential impact may therefore create material uncertainty and going concern challenges in year-end accounts over the coming years and early engagement with lenders is encouraged.

Pensions

Fluctuations in markets have affected pension valuations and many institutions are facing significant financial risks from growing pension costs. Accounting principles have eroded surpluses and in many cases, balance sheet value. The challenge here is the treatment of these contingent liabilities by lenders. The actual cash impact of increased contributions security consultations, valuations and covenants will continue to be a topic of discussion throughout the year ahead and we are increasingly discussing pension deficit bonds to find alternative solutions with providers.

Evolving corporate environment 

In recent years the sector has been moving towards a more corporate market and that hasn’t changed through the challenges presented by the pandemic. HE is a sector benefitting from the low probability of default, lower capital allocation by lenders, low margins and lenders readily waiving covenants. Before the pandemic we were seeing a more corporate lending structure enter HE which was being driven by a focus on institutional autonomy and the need for HEIs to manage themselves sensibly. Due to capital allocation at banks, the long dated bank debt facilities in HE are now typically five year commitments with longer amortisation profiles where applicable. Longer commitments are seen in debt capital markets (USPP / Bonds) with institutional investors, typically the US pension funds continuing to drive strong credit spreads for the leading institutions.

University finance teams are driving improved debt negotiations by linking their ancillary products to their relationship banks. This drives improved returns for their lenders which is then passed on through margins. Driving value with banking suppliers is more than a procurement exercise and the support that all banks have provided to HE institutions has driven the need for strong trusted relationships with lenders.

As these themes continue to play out over the coming months we will happily discuss potential solutions to support your ongoing strategic ambitions.