Section 192(4)(d) of the Education Act 1989 states that an institution shall not exercise the power to borrow, issue debentures, or otherwise raise money without the consent of the Secretary of Education.
The term borrowing includes any form of borrowing and includes such items as bank loans, finance leases, and arrangements with another party for the deferral of payments for the purchase of material assets or expenditure.
There are five key steps in the process of obtaining approval to borrow.
The institution needs to contact its TEC Investment Manager and provide information on how much and the purposes for which they wish to borrow. This will provide us with an idea of what will be involved and whether a business case will be required in support of the borrowing application.
The institution then provides us with a formal application in writing. In the case of major borrowing, a full business case is required in support of the application. A business case is generally not required for small overdrafts and finance leases. In the case of a finance lease, certain additional information will be required.
Investment Managers asses the application and supporting business case (where required). If we need additional information we will let the institution know within two weeks of receipt of its application. Depending on the size and nature of the loan application, further legal work may be required (for example, if a Crown Lease is required). Assessments of applications may involve discussions with an institution's senior management and a visit to the campus.
We will make a decision whether to recommend to the Secretary for Education to grant or decline consent to borrow under Section 192(4)(d). We undertake to make a final decision on an application to borrow within one month of receipt of a complete application.
A further four weeks should be allowed for us to advise the Secretary for Education on the application and recommendation for the borrowing consent to be granted and the application process to be completed. An approval to borrow is usually granted subject to some standard terms and conditions. We will discuss and agree these with the institution on behalf of the Secretary for Education.
Buisness case guidelines
Sections of a business case:
The Crown has sought to encourage the sourcing of capital funding for TEIs from private sector financiers or other sources (such as asset rationalisation, or planning and utilisation of an institution's internal cashflows).
The following set of guidelines provides a generic framework for TEIs considering borrowing. This will help the TEI to build their own business case, or proposal for borrowing.
These guidelines are not mandatory. They are provided as helpful advice for TEIs that wish to raise finance from a commercial source.
Sucessful proposals will:
- be open and honest
- have reasonable expectations
- produce a bankable document
- recognise the key risks and propose their management, and
- recognise the needs of financiers.
Banks will typically base their lending decisions based upon:
- an institution's ability to service the loan through the generation of free cash flows
- the economics of the project being financed
- management's ability to deliver on the project, manage risks and manage the financial affairs of the institution
- security that can be provided.
This information provides some foundation to the structure for the production of a successful proposal to borrow by an individual TEI. The business case will also be required by us as part of the assessment for the recommendation to the Secretary for Education to grant consent to borrow under Section 192(4)(d) of the Education Act 1989.
As a minimum, the following details should be provided in any loan application (over $1 million) that is provided to us (or in any business case provided to financiers). For information requirements on borrowing approvals under $1 million please contact your TEC Investment Manager.
- The tertiary institution applying should describe itself.
- Who you are, your student demographic, and the key markets within which you operate.
- What are the key services/courses you perform/offer in the tertiary education sector?
- What are your main revenue sources and key drivers of demand?
- What are your EFTS projections and key assumptions?
- What is your target customer group and what are you doing to protect/grow that market?
- What is your organisation structure?
- What are your key capabilities and comparative advantage?
- Provide an analysis of the operating environment including key markets, EFTS trends and key strategies.
- What are your mission, goals and key success factors?
- What are your major business risks?
- Key elements of your Investment Plan and/or Strategic Plan.
- Outline of key management members and brief resumes.
- The purpose of the loan should be explained in detail. Alternative investment options should be considered and analysed. This analysis should be from the perspective of meeting objectives of the reason for borrowing. This includes outlining the relationship to capital projects, how the reason for borrowing fits with strategic direction, and the financial implications of alternative investment options.
- Loan details should be explained
- Loan amount, how much is being requested?
- General purpose of the loan eg. funding operating deficit, capital purchase, working capital needs, restructuring costs, undertake efficiency improvements etc.
- Draw down timeframe with relevant partial amounts.
- Term of borrowing.
- Loan interest rates to be expected.
- Repayment sources.
- Repayment dates.
- Repayment terms eg. flat/table mortgages, balloon payments etc.
- Loan security expected/offered. With details as to nature, valuation, criticality to institution's operations and security type eg. unsecured, negative pledge etc.
- Early repayment options offered.
- Consideration of the source/type of funding facility should be explained eg.
- Should the funds be sourced directly off the market, through a bank (or a syndicate), or another lending institution?
- Should the funds be borrowed by way of overdraft, revolving/seasonal facility, commercial bill facility, term loan etc.
- Have development grant agencies been approached as a source of funding?
- What potential financiers have been approached and what are their indicative offerings?
- We will undertake a comprehensive analysis of each business case including the TEI's financial situation and the reasons for borrowing.
The following information should be provided and, where appropriate, explained.
- Copy of recent, preferably audited, financial statements (ie. minimum of Operating Statement, Statement of Financial Position and Cashflow Statement).
- Recent copy of the institution's management financial report and council papers.
- Copy of any internal project evaluation and council decisions in relation to capital project or other reason for borrowing facility.
- Copy of the institution's financial forecast/budget projections for the next 5 to 10 years or the period of the borrowing (which ever is longer).
- Copy of institution's strategic plan and current business plan. What are the institution's key strengths, weaknesses, opportunities and threats?
- List of the key assumptions in the institution's planning documents.
- Over what period does the institution's cash situation become tight?
- What do the current and projected financial ratios tell regarding:
- debt/equity position
- interest coverage
- liquidity position
- revenue tends
- cashflow generated from operations
- operational performance (past and forecasted)?
- Is there an adequate level and satisfactory stability of revenues?
- Is there a sufficient buffer to manage interest rate changes?
- Copy of cost/benefit analysis for the project.
- Commentary should be provided to us on the following:
- The projects contribution to the institution’s strategic direction, investment plan goals and objectives, as well as its contribution to the TES?
- The project’s contribution in terms of each of the borrowing approval assessment criteria?
Additional information to be submitted as part of the business plan for a
- Any initial feasibility study/pilot scheme carried out?
- What background research has been performed?
- Are the costs fixed or variable?
- What are the costs being funded by the loan?
- Have those costs been independently reviewed/obtained from a tender process?
- Are cost projections provided inclusive/exclusive of GST?
- What costs are sensitive to overruns?
- What project management is in place to minimise adverse project cost risk?
- What project reporting mechanisms are used - internally and externally?
- Outline of the capital budgeting approval process used within the institution.
- What checks have been carried out on the key/major suppliers/vendors? What are their experiences?
- Has adequate insurance been considered?
- Has an adequate return on investment/internal rate of return been evaluated?
- How long is the payback period?
- Have realistic inflation and interest rate projections been used?
- Have project financial sensitivities been carried out?
- What is the project’s Net Present Value (NPV)?
- What are the Educational benefits of the proposal?
- What regulatory licences need to be obtained?
- What professional advisors have been engaged and what are their roles? e.g. lawyer, financial advisor, quantity surveyor, etc.
- What are the initial set up costs to the project before purchase/construction actually commences?
- What Quality Assurance programme is incorporated into the project?
- What are the opportunity costs associated with the project ie. an indication of how the resources could be alternatively used to achieve the same ends or alternative purposes?
- What monitoring will be performed of the project’s outcomes and the management of key risks?
- What post project evaluation of outcomes will be performed to measure the success of the project?
- The institution should be aware of the potential causes of failure. These may include:
- completion delays that affect cash flow
- cost overruns
- technical failures
- financial problems with contractors
- government intervention/change of direction
- uninsured losses
- increased prices or shortages of raw materials
- reduction of current or expected EFTS levels
- loss of competitive position in the market place
- management inadequacies.
To ensure we make a fair and adequate evaluation of individual loan applications, the above areas should be covered in the formal business cases submitted to us.
6 July 2015
6 July 2015