Out-Law Legal Update | 11 Jan 2021 | 12:10 pm | 5 min. read
The UK government has released guidance for distressed higher education providers applying to access emergency funding. The restructuring scheme provides support to higher education providers in England at risk of insolvency due to the Covid-19 pandemic.
The application process includes different stages of open book review, including independent business review and requirement for providers to prepare a restructuring plan. Successful applicants will obtain a loan.
The new guidance issued by the DfE follows the announcement on 16 July 2020 by education secretary Gavin Williamson of the government's plans to establish a restructuring regime for the higher education sector in response to challenges caused by the Covid-19 pandemic. Access to the restructuring scheme will provide HEPs with financial support by way of loan. The terms of the loan will be agreed on a case by case basis.
For an applicant to be considered for the restructuring scheme they must be registered with the Office for Students. The HERU's role, staffed by experienced restructuring professionals, is to manage the operation of the scheme. However, prior to submitting an application, the HERU is available to all HEPs in financial difficulty to discuss and obtain advice on how the restructuring scheme operates.
Once the HEP has contacted HERU, a case manager will contact the HEP to discuss its case. Confidentiality will be maintained during all pre-application discussions. Information required to be disclosed includes evidence of the financial challenges facing the applicant. Providers must indicate how those challenges are linked to the Covid-19 pandemic.
The applicant will need to provide information in relation to other sources of finance which have been considered to ensure all commercial, grant financing and other government-backed support schemes have been explored and exhausted.
Once these discussions have taken place the applicant will be required to complete the application form, which includes questions about the financial challenges it is facing, and funding requirements. Further information and supporting documentation may also need to be provided in some cases. The full nature of those additional requirements are outlined in appendix 1 of the new guidance. Examples may include disclosing lender details and financial forecasts. ,Once completed the applicant will enter the 'triage stage'.
The triage stage is the preliminary assessment of the HEP and its eligibility for the restructuring scheme by the HERU. The application will be rejected if HERU is satisfied that the applicant's financial difficulties are not related to the Covid-19 pandemic or the applicant has not exhausted all commercial or other funding options. The application will also be rejected if, on the evidence, the failure of the HEP would not cause significant harm to the national or local economy or society. This assessment will be based on the impact on specified groups: students; teaching provision; local economy and communities; and research and knowledge exchange.
The information will be sourced by HERU from the Higher Education Statistics Agency based on the most recent available submissions. HEPs should check when they have most recently submitted these statistics to ensure they are up to date to ensure there are no delays during the triage stage. A list of information that will be considered is set out in the guidance. Examples include staff and student numbers and details of the number of students studying specific subjects, for example, STEM subjects such as medicine and dentistry.
If the application is refused then the applicant can make representations against the decision by emailing their allocated case manager within 14 days of receiving notification of the decision. The representations will be considered before a final decision is made about entry to the restructuring scheme.
Once the applicant has passed the triage stage, an independent business review (IBR) will need to be undertaken by a firm of financial advisers selected by HERU. This is expected to be funded by the applicant. The scope of the IBR will be bespoke to each applicant but should include a review of; short term cash requirements, historic financial performance, credit arrangements and KPIs, operations, governance, estate and property, education provision, forecasts and strategic plans. HEPs should be aware that an IBR is estimated to take between six and eight weeks.
Whilst the IBR is undertaken, HEPs should draw up a restructuring plan to expedite the agreement of that plan by the HERU. The restructuring plan should consider all elements set out in the government's policy paper and be tailored proportionately to their individual circumstances. It is the responsibility of each HEP applicant to develop the restructuring plan. For the plan to be approved it must have a realistic prospect of returning the applicant to operating surplus with a level of controllable debt and repayment of the restructuring scheme loan within a 'reasonable period'. What a reasonable period may be, in the current climate, is likely to be considered differently on a case-by-case basis.
Following the completion of the IBR, discussions will be held between the HEP, HERU, its legal advisers and financial advisers to discuss the findings of the IBR and agree any amendments necessary to the restructuring plan.
The final decision will be made by the DfE based on recommendations from officials and independent advice from the Restructuring Scheme Advisory Board. On approval of the DfE, the loan will be referred to the chief secretary to the Treasury for final confirmation that funds can be released.
If an application is to bear fruit it will be crucial to lay detailed groundwork in formulating a realistic and viable restructuring plan in contemplation of the IBR given the timelines and information required to progress, or risk funding being approved when it is too late to assist.
In relation to the terms of the loan this will be agreed on a case by case basis. Interest will be charged at a rate to be agreed and will be based on the government guidance relating to use of public money. Financial covenants linked to the restructuring plan will be included as well as provisions relating to specific milestones, objectives or transactions in the restructuring plan. The loan will be monitored by HERU and the achievement of the restructuring plan until repayment of the loan.
The successful applicant will take a loan, on unspecified terms. It may address a short term funding requirement but is unlikely to achieve the required 'surplus' and projected longevity with a sustainable debt position in isolation. A much more comprehensive restructuring, including agreement for support of key stakeholders such as pension funds and banks will need to go hand in hand with any application for support to provide a genuine possibility of recovery.
Where it is considered during the triage stage that the applicant has not yet exhausted all its commercial options, the HERU may recommend a shadow process. The shadow process involves calls between the applicant and the case manager to update them on their position. Entry into the shadow process will reduce the time required to assess the applicant's application for funding, should the restructuring scheme be required at a later date. However, entry into the shadow process does not guarantee that funding will be provided.
This is not a quick fix process. As a minimum, the timelines will be eight weeks for the IBR alone and the HEP will need provision for advisory costs as part of the application. It will be critical to have developed a clear and compelling restructuring plan to take the HEP to a solvent position to stand a chance of achieving funding. Decision makers at HEPs will need to be mindful of their fiduciary and other duties and proceed cautiously whilst working through the application process given the levels of financial distress required to be demonstrated and the lack of certainty on outcomes and timelines.