Raising Bank Finance – an overview

It seems a day does not go past without us seeing the practical impact the spending cuts are having on the Education Sector. BSF funding  has been severely reduced  as has  FE funding. The cuts will have a dramatic affect on capital projects so we thought it would be timely to invite  David Leighton of Finalysis, a  leading Treasury and Cash  Management  Consultancy, to provide his thoughts on what you need to consider when raising bank finance.

Colleges across the country are re-visiting their property strategies now that capital grants have all but dried up. Colleges have revised their estate strategies to that of essential projects for their own well being. The result is that the average project is much less grandiose in scale and overall cost. In the absence of capital grants, Colleges have to fund projects from their own resources; this invariably means raising a portion of ‘bank finance’.

Competitive tender

In keeping with College policies to ensure ‘value for money’ is achieved, a College will typically go out to market by way of competitive tender and issue banks with a Request for Proposal (RFP). The RFP will usually request the banks to provide a lending facility to cover the development period of the capital project; this is known as a Revolving Credit Facility (RCF). During the period of the development/revolving facility no capital repayments are required so effectively this gives the College a capital holiday for the duration of the RCF. The RCF allows the College to manage its net cash flow according to what is required after considering cash inflows i.e. the daily running of the business.

The credit facility

Throughout the ‘revolving/development’ period, say two years, the College will have the option to ‘lock’ into a fixed rate term loan(s), so called ‘tranches’, for maturities out to 25 years, effectively re-financing part or all of the revolving credit. This allows the College the freedom to take advantage of any attractive fixed rate offers available to ‘lock’ away part of its envisaged ‘core’ requirement and provide some certainty for the future .

Alternatively, the College can wait until the end of the revolving/development period and crystallize its ‘core’ requirement at that stage. When the option to convert (part or all of the RCF) is exercised, an amortization or capital repayment schedule is agreed, usually calling for quarterly repayments of capital. The structure, i.e. the RCF and the subsequent re-financing by way of a series of term loan(s) has been tried and tested; it allows the College maximum flexibility and is practical.

Charges

In addition to the interest margin charged by the bank, there are a good number of other issues to consider.

Arrangement Fees – This is a one off fee a bank charges to cover administration costs which is usually payable on signing the facility letter. Usually, it is a percentage of the total amount available under the facility. Sometimes it is a flat fee.

Non Utilisation Fee –This fee is payable on the ‘undrawn’ amount available under the RCF. For instance, if a bank grants a commitment of say £10m and the College only draws down £5m then the bank will charge a percentage calculated on the amount of the commitment ‘not utilised’ i.e. £5m, calculated on a daily basis and charged quarterly. These amounts can be quite substantial particularly at the front end of the development period. These fees are not payable on the term loan(s).

Financial Covenants – The bank will want several covenants put in place to monitor the performance of the College. These covenants will have to be checked so that the College feels comfortable in meeting them - failure could potentially result in an event of default giving the bank the right to call in the loans. Banks are becoming increasingly keen to incorporate a debt service/interest cover covenant.

Security –Most banks (unless the estate is already encumbered) will consider providing a facility on a negative pledge basis (basically an undertaking not to pledge any assets of the College over an agreed amount to any other party) rather than taking formal security by way of legal charges over the estate.

If you are considering raising bank finance you should take professional advice. We have a dedicated and experienced education team who can advise and assist you with the legal aspects of raising finance. Please contact George Davies Partner Nicky Collins on 0161 234 8837 or email nickycollins@georgedavies.co.uk for further details.

Finalysis specialises in the Education sector. The firm has assisted Colleges and Universities throughout the UK, raising over £500m in 'project' finance. Other activities range from banking and treasury reviews to bank relationship and merchant service tenders. Finalysis has over 100 education clients and has been operating in the sector for over eight years.