Banking

Good relations

In financially difficult times, it is important to ensure that you and your bank have a clear and mutual understanding of your circumstances. Dorothea Dunn explains the vital role of relationship banking

The John Lyon School, part of the Harrow School Foundation, recently agreed a £4.7 million loan facility from Abbey. The school was seeking funds for the development of a science and drama block and the purchase of other buildings to be converted into teaching facilities. The loan is structured as a three-year revolving credit facility, which on expiry will convert into a 17-year term loan.

A year or so ago such a loan – structured to meet the long-term needs of an independent school – would have been unremarkable. Unfortunately, times have changed and the sector is finding financing for development increasingly difficult to access. So, while by no means unique, The John Lyon School is counting its blessings – especially given the long-term maturity of the post-construction loan.

Of course, this begs the question – what does The John Lyon School possess that others do not? The answer, perhaps unsurprisingly, is a strong relationship with a bank. Through its bursar Nicholas Marten – chairman of ISBA – the school works closely with its relationship manager, so that the bank was able to structure a financial offering that worked, with a repayment schedule that took working capital requirements into account.

The “know your client and be known by your client” approach cannot be understated, and comes into its own in times such as now, when the flood of credit has receded – just as schools may be looking for financial support. Relationship banks should be able to continue financing schools where they have built up a solid track-record via the provision of a range of lending and, importantly, other banking services. Indeed, David Lyscom, chief executive of the Independent Schools Council, recently emphasised that “in a recession, there is extra need to be on good terms with the bank”.

Banks have not abandoned the independent schools sector. Schools that operate with financial caution – keeping an eye on the long-term health of their institution – can win funding, even for major development projects. Schools that are run according to sensible and conservative policies can still win loans with 20-year tenors for a range of capital development project types: science blocks, sports halls, swimming pools, teaching facilities and boarding school accommodation are all viable proposals for lending.

More than lenders
Many banks can offer schools an array of other financial and advisory services that can prove to have significant value – not just for the smoothing of the occasional loan application.

One area is treasury services, which is increasingly being linked with cash management. Independent schools find themselves cash-rich at key moments in the school calendar, but have costs that have to be spread over the year (although, again, with peaks and troughs). Banks can help schools maximise their earnings from cash, while managing the sometimes complex payment schedules the school must follow.

Cash deposits are a related area, and are particularly important for many educational establishments in an era when finding a safe haven for capital has become a lot less straightforward. There are three factors to consider when depositing funds:
• the yield being offered;
• the security of the institution, measured by its credit rating; and
• the level of access to deposited funds.

Pre-credit crunch, many schools pursued a policy of seeking the highest returns on investments. However, the best rates were offered by institutions that carried a higher level of risk, such as banks from some of Europe’s smaller countries. A safer option would have been to weigh an investment policy in favour of security, and put funds into a stable institution with a high credit rating. Independent deposits experts can advise on this and help determine the best arrangement in terms of yield and liquidity.

A final area for schools under the treasury management banner is the help that banks can offer with risk mitigation, such as hedging facilities to guard against interest rate changes or FX volatility. Banks with a deep knowledge of both the sector and individual schools should be able to help clients simplify sometimes complex needs, while overcoming the inherent risks many may face.

Schools have to do their bit
Yet, of course, a strong bank relationship can only go so far. Schools must present themselves as creditworthy entities. Banks do not set a school’s development policy, or how they present themselves to lending banks.

There are institutions that have made themselves less appealing prospects to financiers due to failures in these areas. Indeed, Chris Woodhead, former chief inspector of schools, now chairman of Cognita, the group that owns and manages a growing portfolio of independent schools, says he has been “amazed at the general inefficiency of some schools”. And some schools have played themselves into trouble by attempting to develop too rapidly, and have, as Jill Berry, president of the Girls’ Schools Association (GSA) says: “Got into an arms race of focussing on having to have the music centre or sports pavilion because their competitors do”.

Others have found themselves in trouble as a result of dragging their feet, failing to identify that their small target market is shrinking. Schools in this predicament include smaller, single-sex boarding schools, particularly lesser-known ones in remote areas. For these, leaving pupils will be much harder to replace.
 
All schools will be feeling pressure in these difficult times from growing rates of pupil withdrawals, declining admissions and declining revenue from endowments and investments. Given this, there has never been a better time to develop a strong and close relationship with your bank. And if your current bank is not interested, find a new one.

Dorothea Dunn is director for education at Abbey UK Corporate Banking. 

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