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"We are allowing universities the ability to access longer maturities – that is obviously attractive and that in particular is making it a very compelling alternative to the bank market"
Richard Bartlett, RBS |
Royal Bank of Scotland has created a new funding tool for UK universities called Unifund. These institutions currently use bank lending and private placements to finance themselves. Unifund allows universities to access the capital markets indirectly by pooling loans into a conduit.
"What we have done is to create a £500 million programme that has a bullet maturity in 2047 which will give universities access to a wider group of investors and target the 40-year part of the curve, which is very attractive right now," says Peter Dooley, director in the RBS corporate securitization team.
Because of the small size of a typical university financing operation – say £60 million – bond finance is not a particularly worthwhile option. But RBS can pool university loans in Unifund, get a monoline to provide credit enhancement and sell securities to institutional investors. This tool transforms universities’ balance sheets because of the ultra-long maturity.
The initial deal is £130 million and priced at gilts plus 57 basis points. In comparison, a recently priced Yorkshire Water 30-year bond wrapped by FSA printed at gilts plus 54bp, while Southern Water’s MBIA-wrapped bond due in 2052 was trading at gilts plus 61bp.
Two universities back the first tap of the conduit, the University of Sheffield, which is rated AA–, and the University of Reading which has no public rating. The bond is guaranteed by Ambac, and it is wrapped to Spens, which cuts some of the risk for investors. The Spens clause requires issuers to pay a spread on the underlying gilt on bonds that are redeemed early.
All future bonds are fungible, so the plan is for RBS to tap the conduit regularly until the programme’s £500 million ceiling is reached.
"We are allowing universities the ability to access longer maturities – that is obviously attractive and that in particular is making it a very compelling alternative to the bank market," says Richard Bartlett, head of corporate origination at RBS.
This structure, in which RBS simply lends to the borrowers in a loan format, cuts the intense work on documentation, such as offering circulars, required for bond transactions. Public bond deals are an intense process especially for small institutions.