Sector trends & challenges
Costs and margin pressure
Operational costs have increased from having to manage COVID-secure accommodation and essential student services. In addition, international demand in 2021 is still constrained limiting revenue and impacting margin.
The impact of COVID-19 on graduate intake was less than expected and the move to online tuition has been broadly successful. 2021/22 intake and beyond might reduce to a new lower base however more will become clear in the autumn.
Increased operating costs due to the pandemic mean liquidity issues remain tight at many institutions which is putting pressure on covenants. Increasing caution and selectivity is being seen among bank and non-bank lenders.
Sector rating profile
The impact of COVID-19 on overall graduate intake was less than expected, with limitations on place deferrals supporting student numbers. The crisis initially foreseen by COVID-19 did not materialise on the back of a move to online tuition being broadly successful. Any impact on the 2021/2022 intake will become clear in the coming weeks seeing as A level results have now been published. There remain areas of significant stress across Higher and Further education that were already in financial difficulty pre-COVID.
Increased operating costs associated with remote learning mean liquidity issues remain tight at many institutions, which in turn is putting pressure on covenants. Operational costs have also increased from having to manage COVID-secure accommodation and essential student services. In addition, international demand in 2021 has been constrained due to continued travel restrictions. UK universities with international campuses may benefit from geographical presence and be able to mitigate this challenge better than others. The poor experience that 2020 intake students have had over the past year could have an impact on 2021 numbers. Perhaps remote university courses will become more commonplace as a lasting impact of the pandemic; however the vaccine rollout and pent up demand will hopefully support healthy intake numbers. Either way we expect capex spend to remain restricted for some time yet.
The insolvency of a higher education institution is untested and would be both risky and complicated. As such, both universities and colleges should seek financial advice in order to maintain financial resilience, irrespective of any future trends or issues.
As a mitigator to covenant pressure, increased use and acceptance of virtual learning may help institutions divest of real estate and reduce overheads, though the impact is likely to be limited.
Students continue to demand more flexible and affordable study options, especially considering COVID-19 has impacted 2021 term time, with new technologies disrupting traditional teaching models. IT infrastructure is essential to maintain virtual studies and investment may be required if current capacity and systems are inadequate. The real challenge comes with teaching that requires a physical presence and practical lessons, such as with physical sciences and medicine. It is unlikely for these courses to ever be fully replaced by virtual teaching and therefore certain university departments will have to continue investing heavily in equipment and infrastructure.
Pre-existing issues such as pension contributions and EU talent availability remain across the sector which includes increasing caution and selectivity among bank and non-bank lenders.