When Dean Curtis, deputy vice-chancellor and chief finance officer at the University of East London (UEL), took up his position in February 2018, the institution was in the midst of a crisis.

After a period of expansion and investment that wasn’t ultimately matched by student number growth, the university had broken its banking covenants not once but twice.

At the time, the situation was practically unheard of. “I came in…to basically make sure it wasn’t [a case of] three strikes and you’re out,” Curtis told ̽����Ƶ.

Eight years on, UEL appears to have turned things around, generating a surplus and describing itself as being .

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But what was once seen as an extreme case is now becoming more common, with many UK universities coming increasingly close to breaking their banking covenants – prompting fears that they may no longer be seen by creditors as a “going concern”. To avoid this scenario, universities are selling off buildings, cutting courses and axeing employees – leading some academics to see covenants as something of a big bad wolf.

But what exactly are covenants – and why do they have such big teeth?

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In simple terms, covenants are the financial conditions that an organisation agrees to maintain when it borrows money. Lenders see those conditions as a benchmark of good financial health, ensuring that the organisation remains in a position to service its debt. So when it falls below one of these benchmarks – that is, it “breaches the covenant” – lenders see that as an immediate red flag.

Perhaps the most striking example of when breaching an agreement with the bank has escalated into a full-blown crisis is the University of Dundee, which had a (RCF) with the Bank of Scotland: a form of flexible finance that offers credit as and when needed.

The Gillies report, published after the Scottish government had to bail out the university at an initial cost of £22 million, found the institution had breached its covenant relating to “net operating cash to service costs”. This meant that, as of July 2024, Dundee was not generating enough cash to service its costs. The report shows the university contacted the bank in October 2024 to ask it to consider “not introducing” a test it knew that it would fail. The bank formally agreed not to test this covenant as part of the renegotiation of the RCF, but the university’s access to the fund was ultimately suspended anyway – adding to its deep financial woes.

While perhaps the most extreme and well-publicised case, Dundee is far from the only university struggling with its lending agreements. 

“There’s no doubt there’s a handful of universities that have either breached financial covenants or…are forecasting breaches in the future,” said Matthew Howling, principal associate at legal firm Mills & Reeve.

“The financial covenants that are under strain are those around generating sufficient cash flow or generating sufficient surplus – either to cover interest and principal payments on the debt or [just] interest payments,” he said. “For example, a university might covenant that its annual surplus will be one and a half times its interest payments for the year.”

Universities at risk of breaching such terms are “in discussions” with their banks, Howling said. “Lenders are still fairly amenable and prepared to grant amendments, but they want something in return.”

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UEL is not the only university to have come close to breaching covenants. Sheffield Hallam University’s accounts for 2022-23 noted that its operational deficit of £1.1 million had obliged it to draw up “mitigating actions to ensure that there are no covenant breaches”; at the end of 2023 it opened a voluntary severance scheme for all 1,700 of its academics. London South Bank University’s accounts for that year stated that it had written off £16 million in “bad debt”, pushing the institution into deficit and causing it to breach a banking covenant – though its bank issued a waiver. And there persistent rumours of other universities being in dire financial trouble and severely trying their banks' patience.

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Covenants have come to loom so large over the sector due to the unprecedented scale of its debt, owing to a spike in borrowing over the previous 20 years. In particular, the long period of low interest rates that preceded the pandemic encouraged vice-chancellors to borrow liberally to fund expansion and campus renewal. Unlike private companies, higher education providers are unable to raise money by issuing shares, but with student numbers growing, taking out loans – or even issuing bonds – seemed like a safe bet.

“At that point…there was no reason to think there isn’t going to be a long-term good outlook,” said Adrian Bell, associate pro vice-chancellor for research at the University of Reading. “[So] you go out and find the best financing you can. You think you can repay it without any concerns because you think that you’ve got that income coming in, fixed for the next 10, 20 years.”

In addition, universities were offered very favourable terms by banks, based on their high credit ratings. As Barrie Davison, national sector head at the NatWest bank put it, “Historically, many of the banks have assumed that…[universities] are a zero-loss sector”, particularly as there was an assumption for a long time that the government would always bail out failing institutions.

and others, published in the International Review of Economics and Finance, found that UK universities’ total debt grew by 180 per cent between 2008 and 2019. Long-term debt more than doubled in four years, hitting more than £150 million by 2019, making up two-thirds of the total debt.

This debt, the paper’s authors found, was not taken on to stay afloat, but primarily to “finance asset purchases”, such as new buildings. In England, these investments were justified as necessary to keep up with the increasing demands of students, who were now paying £9,000 per year in a competitive market.

In 2019, that UK higher education institutions had invested £8.8 billion into capital projects since 2014 – nearly as much as the entire cost of hosting the 2012 Olympic Games.

“Many institutions entered into long-term loan arrangements with banks, and that’s where you get the covenants,” said Bell. “Banks want something in return because they don’t just want to know they’re going to get paid [in the short term]; they want to know what’s going to happen when times are hard.”

Universities, though, perhaps paid insufficient attention to that question. The wisdom of taking out all those loans looks decidedly questionable in the wake of a pandemic, rising costs and interest rates, restrictive immigration policies and an ever-dwindling unit of resource. Nearly half of English providers face financial deficits, resulting in cuts equivalent to 15,000 jobs being announced at UK universities over the past year. With no obvious end to the crisis in sight, University of East Anglia vice-chancellor David Maguire recently predicted an ongoing 10,000 job cuts every year.

For his part, Bell offers a pithy verdict on whether taking on debt 10 years ago was sensible: “Knowing what you know now, you wouldn’t do it.”

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Shortly after Curtis arrived at UEL – before the sector as a whole was facing the scale of challenges that now confront it – he entered into what he called a “cash conservation process”, putting a stop to capital investment and focusing on building up reserves.

“The continuation of…indebtedness with those covenants was actually going to harm the institution’s trajectory,” he said, owing to the amount of time that management would need to devote to trying to meet the covenants – a distraction from the things the university really wanted to do.

But could it have been even worse? Might the bank actually have called in the loan and forced the university into an asset fire sale or even closure?

Perhaps not. Relationships between universities and banks are often very long; Imperial College London, for example, has been a client of NatWest’s for over 200 years, according to Davison. That reflects the longstanding sense that universities were a safer bet than most commercial propositions. And the conditions under which loans are issued to them remain quite distinct from those offered to the private sector, he said.

“In the university space, you’ve got hugely diverse revenue streams. Clearly, student tuition fees are the biggest part of that, so that’s one of the things that we look at quite closely,” he explained.

Lending conditions vary according to the university in question’s particular financial position, but they could include metrics such as gearing – the extent to which the institution’s operations are financed with borrowed money compared with its own cash – or interest cover – how easily an institution can pay its interest out of its operating profit.

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Speaking anonymously, one university finance director told ̽����Ƶ that the condition monitored most closely by his institution’s bank is cash flow cover – whether the institution has more money in the bank than it did 12 months prior: “If you breach that covenant…the bank might say: ‘We want all of the money back’ – and that could be an existential risk depending on how much you’ve borrowed.”

In reality, however, the likelihood of a UK high street bank forcing the closure of a university is low, given the public relations crisis it would likely cause. “The thought of trying to realise security from a university, reputationally, is not where NatWest would want to be,” said Davison.

Notwithstanding the Scottish government’s Dundee bailout, it is “clearly not the case any more” that government rescues of distressed universities are inevitable, Davison noted. Nevertheless, the bank would still seek to work with officials to help find a way out for a distressed institution.

“In the event that [a university was] in that situation, we would want to make sure that we did whatever we could to preserve the ongoing operations of the institution, so we’d work very closely with the Office for Students [and] the Department for Education,” Davison said. “And there are a couple of cases where we’ve done this to provide a package of support that puts them on a sustainable footing.”

Renegotiations are typically straightforward, Davison added: “Because we are long-term lenders, we look through the short-term noise.”

That said, NatWest’s clients are carefully selected. “By virtue of being very, very choosy in terms of which universities we’ll support, it’s very, very rare that we get into a situation where a client has breached their covenants because we do so much stress testing on the business case at the outset,” he said.

Complications tend to arise, he continued, when there are other lenders involved, particularly foreign ones that may be less sympathetic to the plight of British universities.

“When you’re dealing with a situation where you’ve got multiple creditors that have different objectives, that’s when it becomes difficult. If it’s all UK clearing banks, it’s much more straightforward.”

According to Ian Ackroyd, director at financial advisory firm Interpath, “lenders are continuing to be supportive in situations where, in my opinion, if this was corporate land, they probably would have asked a borrower to go and find an alternative lender.”

But what’s the catch?

Banks “work with a university many years in advance of the point when they’re needing to be paid back”, Ackroyd added. And that does impose some limits on managers’ room to manoeuvre.

Mills & Reeve’s Howling agreed. “The banks, to a certain extent, have control operationally over what a university can do, so it can be very difficult for a university to do certain things operationally without bank consent,” he said. “And, of course, if [the university] needed new money or if they’ve got a [credit] facility that’s up for renewal, the bank is likely just to say ‘no’ unless they sort [their financial] position out.”

Indeed, some academics are concerned about the level of control lenders exercise over the sector, particularly when times are hard. When job cuts were mooted at UEA in 2024, for example, union members accused the institution’s leadership of choosing to placate banks over supporting livelihoods.

But everyone interviewed for this article maintained that banks do not directly instruct universities on managerial matters – such as making redundancies.

“We’re not directive, but we do challenge,” said Davison. And that challenge is manifested particularly in relation to courses that have low student numbers or aren’t aligned to the government’s skills needs. “We just challenge that strategic plan and share with [managers] what we’ve seen from across the sector, rather than directing strategy,” he said.

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Despite the tumultuous situation, banks are keen to emphasise that they remain supportive of the sector and that loans are still being issued.

“In the last six months, I’ve written £500 million worth of new debt to universities,” said Davison. But, he continued, “the demand for longer-term [debt] facilities at this moment in time just doesn’t exist, which is why we as a lender are quite happy to step in and provide traditional revolving credit facilities over a longer term”.

Or, as Ackroyd put it: “Universities aren’t looking for that big vanity project any more.”

NatWest’s recent loans, instead, have been issued to fund acquisitions and institutional realignments that leaders hope will help their institutions rise in the rankings and attract more overseas students, Davison said.

But NatWest is not the only lender that chooses its clients carefully. Among lenders in general there has been something of a “flight to quality”, according to Howling.

In general, “if you’re a higher-tariff university and you want to borrow some new money…there will be various banks who still want your business,” he said. “That’s a harder conversation if you’re not [that type of] institution. But I haven’t seen any institution that has been completely starved of credit yet.”

Still, even a restriction of access to credit could put an institution in “an increasingly difficult financial situation, according to the university finance director, speaking anonymously. And in their opinion, this will “probably lead to more institutions having merger conversations”.

Some already are: according to Davison, “a couple” of his clients “are looking at mergers at the moment, just to give them that critical mass so that they become relevant on the international arena”.

In some cases, merging may be less a matter of choice than of necessity. “I think we’re at a stage where universities are probably reaching the limits of self-help and what they can just do individually,” said Howling. “There are only so many levers the banks and lenders have got, as well.”

Add to that the fact that the government wants to “see more consolidation” in the sector and more mergers seem inevitable, Howling thinks.

“Whether that will actually solve the financial problems is anybody’s guess,” he said. “But certainly that seems to be the direction of travel.”

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