2020 was quite the year. COVID-19 has had so many impacts and continues to do so. Coronavirus and measures taken to contain it have undoubtedly impacted the FE and HE sectors both operationally and financially and the costs of re-opening, and keeping open, clean and COVID secure campuses, are significant.
There remain uncertainties as to what the future holds which come on top of many years of financial challenge for the sector. This has several accounting ramifications that each sector is having to carefully consider in preparing their 2020 financial statements. Some accounting issues will directly impact the numbers in the 2020 financial statements, whilst others will have more of an impact for the next financial year and will therefore need to be considered when looking at going concerns. The OfS and ESFA have formally recognised the challenges providers may face in finalising their audited accounts this year and have extended the submission deadlines (31 January for FE and an additional two months for HE). We are working with institutions on new/amended banking facilities needing to be completed to allow the sign off of their accounts.
There are then risks of a breach of one of the bank loan covenants (in particular the ratio of Earnings Before Interest, Depreciation and Amortisation (EBITDA) to total debt servicing costs). The implications of this could be significant and proactive management is recommended given the potential impact on an institution’s financial health and its relationship with its current lender.
Adhering to loan covenants is likely to be an area of concern for both this financial year and for future periods and needs to be taken into account when assessing going concern. If forecasts predict loan covenants are likely to be breached then if not already done, ideally take this up with the lender as soon as possible to address whether waivers can be obtained by the reporting date, and if not assess whether the loan classification and going concern assumption remains appropriate. In this context, consideration may also need to be given as to whether any financing or refinancing will be impacted, and if so, what impact this may have on the accounts in terms of loan disclosures, the potential impact of any debt modifications and also the knock on impact on any capital commitments which are dependent on finance from external sources.
In addition, if not already on the agenda with lender, FE/HE providers should also be aware that the Financial Conduct Authority has encouraged participants in financial markets to work to a target date to phase out new LIBOR linked facility agreements by the end of Q1 2021 in the knowledge that LIBOR will no longer be published after 2021. Any new facility documents which mature after the end of 2021 should include appropriate wording to deal with the transition from LIBOR to new RFRs (Risk Free Rates), which are overnight rates derived from real transactions.
Many lenders are actively working with borrowers now to amend existing facility documents maturing after the end of 2021. Additionally, borrowers should remember that if the benchmark interest rate in a facility agreement is to change from LIBOR to a RFR, then any related hedging documents should also be amended to ensure that there is no mismatch in payments.
Time is running out so if the process has not already started, borrowers need to consider taking action to prepare their business including seeking advice from their independent financial and/or legal advisers if they are unsure. For more information, they should take this up with their lender where the existing debt facility is tied to LIBOR.
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