QMPF is being asked to support a number of its clients through restructuring and renegotiation of their existing borrowing. It can seem a daunting process to undertake…but this doesn’t have to be the case.

Context

There are numerous financial challenges being faced by the higher education (“HE”) sector including higher interest rates, a rising cost base and the steady erosion of the value of tuition fees in real terms. Universities must also compete within a dynamic external environment, with changes to visa regulations, and global factors increasing the volatility of international student recruitment.

The Office for Students (“OfS”) published its annual review on the financial sustainability of the English HE sector in May 2025. It highlighted the third consecutive year of declining surpluses, net operating cash flow and net liquidity. A significant number of  institutions are anticipating accounting deficits for three consecutive years. However, recent trends of declining net operating cash flow as a proportion of income are forecast to reverse from 2024/25 onwards; albeit the increase in cash generation through 2027/28 is slower than previously estimated (link to OFS report).

In September 2025, the Scottish Funding Council (“SFC”) followed suit with its report on financial sustainability of Scottish universities covering the period 2022/23 – 2026/27 (excl. the University of Dundee). This highlighted the declining operating surplus across the sector – £17.2m in 2023/24 compared to £210.8m in 2022/23 – although this is forecast to improve to £51.5m for 2024/25. However, the SFC notes that this overall position is distorted by the two largest universities (Edinburgh and Glasgow) with nine (53%) reporting an underlying operating deficit in 2023/24, ten (59%) in 2024/25 and eleven (65%) in 2025/26.

Aggregate cash balances at Scottish universities are projected to decline from approximately £1.7bn in July 2024 to £1.5bn in July 2027, with ‘liquidity days’ falling from around 183 in 2022/23 to 115 in 2026/27. The SFC emphasises that no Scottish university is forecasting a cash deficit over the forecast period but acknowledges that many are taking mitigating steps to maintain positive cash balances. (link to SFC report).

In addition, there are currently more than 100 universities across the UK which have undertaken or are in the process of some form of redundancy or staff restructuring scheme, demonstrating that this is not an issue restricted to a small subset of institutions. (Source: UCU website).

International student recruitment has become more important for financial sustainability, while also becoming less predictable year-on-year. Some universities are exposed to an overreliance on specific countries or regions, which in turn can be affected by global macroeconomic conditions impacting the willingness or ability of international students to apply to study in the UK. The recent announcement regarding a potential levy on international student fees, has added to the potential pressures being faced by the sector and risks choking off this valuable income stream which often cross-subsidises research and domestic tuition.

These headwinds are increasing pressure on financial covenant compliance and universities are also experiencing a greater level of scrutiny from auditors regarding going concern, with assessments often looking forward more than one year at the point of financial statement sign off. The assessment will consider expected or potential covenant breaches, liquidity under downside scenarios, refinancing risk and relationships with existing lenders. It is therefore important to act promptly to resolve any potential issues, giving you greater breathing space to manage your financial performance.

Five Steps to Managing the Challenges

Forecasting: It is critical that the forecasting and budgeting process presents a realistic position for consideration: not too optimistic but also not overly pessimistic. Scenarios can be used to plan for positive performance but demonstrating resilience under realistic downside assumptions. Performance against financial covenants will be one of the key outputs and areas of assessment.  You may find that a temporary rebasing of covenants or potentially a partial waiver is required.

Funders will want to review forecasts in detail and understand the underlying assumptions being made regarding student recruitment and operating costs. They will also want to review “upside” or “downside” cases and understand their rationale, underlying assumptions and potential mitigating responses in adverse scenarios. The selection of the “base case” forecast will be important for proposing an acceptable outcome for both the university and funders. A monthly cash flow forecast can be a useful tool to demonstrate how you will manage intra-year fluctuations in liquidity.

Understand your options: Where actions are required, there should be a thorough and transparent review of the current operating position to consider how turnaround can be achieved, within the context of your strategic plan. Points to consider include:

• Capital expenditure: can some of this be paused or the spend profile extended, reducing outlays in the next few years? Could some projects be funded by third-party investment?
• Existing assets / rationalisation: is it possible to dispose of any existing assets to generate cash? Can utilisation of the existing estate be improved, reducing the need for development of additional facilities?
• Staff Redundancy schemes: although understandably these are not popular, they are unfortunately required in some cases to lower the cost base.

The sector has historically been (and remains!) an attractive proposition to funders via traditional bank lending and institutional investors offering private placements (“PP”) or income strips (indexed leases). As the availability of longer tenor bank facilities reduced, universities accessed capital markets to obtain longer term debt through private placements from institutional investors. There is a range of existing lenders to the sector (also including legacy European Investment Bank loans) and universities will often have to agree covenant amendments with multiple lenders and investors. In our experience, funders are keen to highlight their ongoing support for the sector and willingness to assist with any potential amendments required.

Covenant Amendment or Renegotiation: With these mitigating actions layered into your forecasts, you can then forecast financial covenant performance and consider whether funder engagement is required. We generally recommend to our clients that, rather than look to the funder to provide its preferred amendments, they should pro-actively propose a solution which includes:

• the reasons for changes in forecast performance;
• mitigating actions being taken;
• proposed amendments to financial covenants (if required); and
• revised financial forecasts.

This will not necessarily be the final, agreed position but provides a strong starting point and gives the funder confidence that sufficient review has been undertaken. The publication of the Gillies report in June 2025 has further reinforced the importance of having robust governance processes in place as well as the timely provision of key information to stakeholders (link to report).

In some cases, there may be a cost associated with the covenant amendment solution. Funders can expect a quid pro quo for their cooperation, which could manifest as a one off fee, an increase in the credit margin or reduction in loan maturity or size. Legal costs (your own and those of the funder) may also be payable depending on the extent of documentation amendments.

Funder Engagement: Generally, we believe in proactive, regular communication with funders to build goodwill and provide for better outcomes. PP investors can take a more passive approach to borrower engagement than relationship banks. Some PP investors will depend upon external legal counsel to advise them during a negotiation (fees paid by the borrower), as they may not have this type of internal expertise. Banks, on the other hand, prefer more frequent engagement and management information, and have their “in house” views and credit specialists with particular preferences (such as standardised approaches to covenant definitions).

We believe that funders are best approached with a clear description of the issue and a realistic solution, including proposed changes to legal drafting or covenant definitions. This allows the funders to more easily navigate their credit process and initially “anchors” the negotiation in the borrower’s favour.

A clear timeline and rationale for the amendment should be provided, allowing all funders to work to the same date.

Debt Restructuring – Repayment or Refinancing: Depending on the structure of your existing debt and hedging arrangements, there may be financial or commercial benefit in early repayment. It could be replaced with a new facility or simply repaid from cash reserves if these are sufficient.

There are still institutions with long term bank loan facilities dating back to the mid-2000s (pre financial crisis) with fixed rate interest rate arrangements. While prevailing interest rates were low, there would normally be a hedge breakage cost associated with early repayment. However, as prevailing interest rates have risen since 2022, many fixed rate facilities are now in a position where a breakage gain could be payable to the borrower. This is a payment to the university which nets off against any capital repayment. A review of your specific loan agreements and swap documentation will be required but generally, if current market rates are higher than the underlying fixed rate of your loan, a breakage gain would be payable by the funder and vice versa if they are lower.

The sector as a whole has taken a measured response to the higher interest rate environment and financial sustainability challenges, with  gearing levels, measured by ratio of borrowing to income, reducing from an average of 33% in 2021/22 to 28% in 2023/24. This is forecast to reduce further to c. 25% by 2027/28 (England only).

Repaying existing debt will deliver cash flow benefits as you no longer have ongoing debt service obligations however, if not replacing with new debt, reserves will have been diminished and this may impact liquidity and longer-term expenditure plans.

How can QMPF Assist?

We can provide support to universities in navigating this environment, evaluating any debt restructuring options and assisting in delivering solutions. Our experience supporting the sector is longstanding and we have good relationships with its primary funders. We can support you through:

• Forecasting: preparation of financial forecasts / models is at the core of our work and it is critical that any forecasting which is developed is robust and transparent. QMPF can assist in development of your forecasts or undertake a review of existing forecasts, acting as a “critical friend”, prior to circulation to funders.
• Understanding the market and lender engagement: The core of QMPF’s activity lies in Higher Education having worked with numerous HEIs and supported the sector for over 20 years.

We have strong relationships with across the funding market and are in regular contact as part of our wider market engagement. These relationships allow us to have candid discussions with key funder contacts during the process and we find that this approach deliver the best outcome for our clients.

We believe that a skilled intermediary can help find solutions and reduce the workload of internal finance teams during periods of potentially difficult circumstances.

• Refinancing and Arrangement of New Facilities: Since the start of 2024, we have supported clients with over £300m of new borrowing (primarily delivering liquidity through Revolving Credit Facilities) and we are currently active with a number of clients, supporting them with a review of debt options, covenant negotiations, repayment of existing borrowing (incl. benchmarking of any early termination gain / cost using Bloomberg to access live market data) and procurement of new facilities. Our market coverage means that we can provide you with visibility of the full range of refinancing options.

We have also worked on private placement covenant renegotiations, restructurings and consent solicitations for a range of universities – on certain engagements, these have often taken place in parallel with new debt raises or restructuring of existing facilities.

• Liquidity and Treasury Management: As part of this process, you may choose to refresh your wider treasury management policy or benchmark your approach to liquidity. We are retained by several clients to provide ongoing strategic and treasury management advice leveraging innovation and technology where possible to allow HEIs to make better, more informed strategic decisions.

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Financial Sustainability in Larger Higher Education Providers: Reflections from the BUFDG Annual Meeting 2025

The UK Higher Education (“HE”) sector continues to face financial headwinds driven, in part, by limited increases in domestic tuition fees, volatility international recruitment and inflationary pressures. The May 2025 Office for Students (”OfS”) financial sustainability report highlighted that 45% of providers are expecting an operating deficit in FY24/25, with many universities announcing redundancy and restructuring programmes to improve their financial position.

QMPF recently held a practical workshop at the British Universities Finance Directors Group (“BUFDG”) annual meeting, which was attended by around 40 finance leaders from the UK’s larger Higher Education Providers (“HEPs”) to explore the pressing challenge of financial sustainability. Facilitated by QMPF, the session was designed as a practical, interactive forum to share experiences, test radical ideas, and identify actionable strategies to improve cost efficiency and revenue generation. The discussions were candid, energetic, and grounded in the realities of a sector navigating financial challenges.

Risk and Execution Matrix

The session was framed around a ‘risk and execution matrix’ allowing participants to consider options available against the difficulty of implementation, time to deliver and the scale of their potential impact.

A sector beyond quick fixes

A clear consensus emerged early in the session: the era of “quick wins” is over. Most institutions have already implemented basic cost-saving measures, cutting discretionary spend, reducing travel, and tightening procurement. What remains are the more complex, systemic levers that require time and strategic consideration to pull.

Participants highlighted estates, workforce, and academic portfolios as the most significant areas for potential savings, but also the most difficult to change. Estates, in particular, were seen as underutilised, with a call to reimagine campus footprints in light of evolving hybrid teaching models. Yet, decisions around estate optimisation are difficult, shaped by different ownership structures, locations, and the long-term vision of each institution.

Workforce rationalisation was another recurring theme. Legacy contracts, pension obligations, and sector-wide pay agreements continue to be challenging. While some institutions are exploring outsourcing or contractual changes, these approaches remain nascent and fraught with reputational and operational risks.

Radical Thinking: The “Department of University Efficiency”

To provoke fresh thinking, participants engaged in a thought experiment: what if Elon Musk were appointed COO of a university with a mandate to increase net operating cashflow? The resulting “Department of University Efficiency” (DOUE) surfaced a provocative set of ideas, some tongue-in-cheek, others plausible.

While many of these ideas would be politically challenging, the exercise underscored a key insight: the sector’s current constraints—governance, regulation, stakeholder expectations—limit the range of viable financial strategies. When finance leaders are able to explore ideas without the current sector’s constraints, the option set expands dramatically.

Revenue & Cash Generation: Opportunities and Limits

On the revenue and growth side, the conversation was more cautious, reflecting the competitive recruitment landscape for domestic and international students. While international partnerships, transnational education, and asset monetisation (e.g., sale and leaseback of assets) were seen as promising, participants acknowledged the complexity, management effort and long lead times involved. Philanthropy was cited as a successful strategy for some institutions, but not universally replicable.

Importantly, there was a shared recognition that not all commercial ventures are worth pursuing. In some markets, activities like summer lettings or conferencing may yield limited returns. The message was clear: focus matters. Institutions must be selective, aligning revenue strategies with their unique strengths and market positions.

Final Reflections

The session was a timely and thought-provoking exploration of the financial crossroads facing larger HEPs. It revealed a sector that is pragmatic, collaborative, and willing to face the sector’s financial challenges. While there are no silver bullets, the session affirmed that with shared insight, bold thinking, and strategic focus, universities can chart a sustainable path forward.

How can QMPF help?

We can provide support to universities in navigating this environment, evaluating any change opportunities, debt restructuring options and assisting in delivering solutions. Our experience supporting the sector is longstanding and we have good relationships with its primary funders. We can support you through:

• Forecasting and options appraisals: preparation of financial forecasts and models is at the core of our expertise. It is critical that any forecasting to inform decision making is robust, transparent and able to present a range of scenarios. We can assist in development of your forecasts or undertake a review of existing forecasts, acting as a “critical friend”, prior to circulation through internal governance or externally to funders or regulators.
• Lender engagement and covenant negotiation: We have developed strong relationships across banking and capital markets over 20+ years advising in the HE sector, which are maintained through our live engagements. These relationships allow us to have candid discussions with funder contacts and anticipate key credit We believe that a skilled intermediary can help find solutions and reduce the workload of internal finance teams during periods of potentially difficult circumstances.
• Refinancing, re-optimisation and arrangement of new facilities: We are actively supporting various university clients on debt options analysis, covenant negotiations, asset optimisation, repayment of existing borrowing (including benchmarking of hedge breakage gains/costs using Bloomberg) and procurement of new facilities. Our market coverage means that we can provide you with visibility of the full range of refinancing options, including property-based solutions such as income strips.
• Liquidity and Treasury Management: In the current environment it may be prudent to review your wider treasury management policies or benchmark your approach to liquidity. We can provide ongoing strategic and treasury management advice leveraging innovation and technology where possible to facilitate better, more informed strategic decisions.
• Trusted Advisor: We aim to develop long-term client relationships and can act as a trusted advisor, deploying our expertise to assist you in the development of innovative strategies to maintain financial and operational sustainability. We can provide independent challenge, support and guidance in managing governance processes, including project management of the implementation of strategic plans.

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An introduction

QMPF has previously produced a general introduction to ‘income strip’ finance which you can find here.

In the Higher Education sector this financing route has gained increasing prominence both through its use in off-balance sheet structures to deliver Design Build Finance and Operate (“DBFO”) student accommodation projects, such as that for University of Staffordshire (Project Detail), and its use for direct fund raising, such as transactions for the University of Lancashire  and University of Kent.

The emergence of income strips has partly been driven by the increasingly selectivity of other funders to the HE market, constraints on availability of long-term lending from commercial banks, and the competitive position of income strips when compared to index-linked bond financing for DBFO projects.

With more of our clients considering income strips and an increasing number of providers in the market, we have identified a number of matters universities should contemplate where they are considering this financing route.

How do income strips compare with debt?

Universities have historically used debt to meet funding requirements and deliver long-term investment. Given very restricted availability of long-term commercial bank lending, financing for longer term capital projects tends to be limited to:

• Capital markets funding: private placements or public bonds, which generally pay interest at fixed rate with a bullet capital repayment on maturity;

• Initial use of shorter-term bank lending (including Revolving Credit Facilities) with the need to refinance this in the future; or

• Income strip finance (we are also seeing emergence of secured debt structured with an inflation link, sharing many of the features of an income strip).

More generally, income strip and debt finance also have several different features including:

How might the finance costs compare?

The annual financing cost from structures, and how its varies over its full term (through inflation, interest rate risk or amortisation) is a critical question for HE institutions.

An income strip is based on provision of upfront capital (a “lease premium”) from a funder in return for committing to an inflation-linked series of lease payments. The product is priced based on a ‘net initial yield’, reflecting the initial rent level divided by the upfront capital provided. The lease payment is subject to annual increases to reflect a chosen indexation basis. This may be further subject to a cap and a floor. The lease length, indexation basis and cap/floor levels all impact pricing and are important aspects of deal structuring.

When compared purely on an IRR basis, income strip finance can appear more expensive than equivalent term debt. However, the structure provides benefits of a significantly lower initial debt service costs, wider availability, long-term maturities (with no refinancing risk) and it will not normally include financial covenant tests for the borrower. In current market conditions income strip finance offers:

The main disadvantages of an income strip structure are its relative inflexibility once transacted, and the exposure to inflation-risk on future debt service (albeit this can be mitigated through the cap). The lease payment obligations will also normally be considered within borrowings by financial covenant tests in other debt facilities, so it is important to check relevant drafting and monitor the impact.

We would recommend a full consideration of funding options – which, in addition to pricing, should consider their commercial implications, pros/cons and suitability for your specific circumstances – before embarking on a funding process.

Other considerations

In contemplating an income strip there are a range of wider considerations relevant to HE institutions. These include:

Structuring depends on the funding purpose

While an income strip is a catch all term for long term index linked leases with asset reversion to the borrower, they can be structured in a number of ways.

This is frequently driven by the purpose of the fund raising. Where the project involves development of the asset (or other capital spending on the asset), a number of options exist on how the leases can be structured alongside development finance. Consideration needs to be given to issues including where development risk sits, how works are contracted for, financial diligence on contractors, lease start dates, delay risk, funder step-in rights and long stop positions.

To address these a number of structures have emerged in the market, including where the lenders acts as both funder and developer, inclusion of a third-party developer or the University retaining the development role. Where an income strip is used to raise finance for other general purposes, on an existing asset, these considerations become simpler.

Similar considerations are also likely to apply where an income strip is used within an off-balance sheet structure, for example in a “DBFO” student accommodation partnership. These projects can add further layers of complexity and specialist legal and tax advice is typically taken.

QMPF in the income strip market

QMPF’s income strip experience is long-standing. Our first income strip transaction with a university was with Swansea in 2011 and we supported University of Brighton to finance a DBFO transaction using an income strip over 5 years ago. More recently we supported University of Staffordshire deliver its student accommodation DBFO project, where the DBFO project company is income strip funded. There are also several current projects we are acting on considering this evolving funding option.

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