There are suggestions of serious financial concerns at a handful of English universities worried about breaching their banking covenants, with government made aware of the situation, as ministers are urged to recognise that ¡°a major university going bust would be a very real difficulty for everybody¡±, including themselves.

The funding crisis ¨C combining real-terms cuts in funding for domestic students under the frozen fee cap with early signs of a fall in overseas student numbers ¨C?is now having?an acute impact.?There are suggestions in the sector that a small number of institutions are concerned about the possibility of breaching their covenants on borrowing with their banks, which require institutions to maintain certain levels of financial performance.

Breaching covenants could leave an institution unable to class itself in its accounts as a ¡°going concern¡±, able to meet its financial obligations for the next 12 months.

Until now, the sole message on potential institutional failures from government and the English regulator, the Office for Students, has been that there will be no ¡°bailouts¡± for universities. But the level of financial challenge across the sector and complexity of a potential major university failure requires a fuller strategy from government, according to senior figures.

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John Rushforth, executive secretary of the Committee of University Chairs, which represents heads of UK governing bodies, said that while support from the government or regulator for a university with ¡°temporary cash-flow¡± issues might be relatively straightforward, the situation could be more complex ¡°if it¡¯s a large institution and it¡¯s a more systemic failure because the market isn¡¯t there and the demand isn¡¯t there¡­the squeeze on fees hasn¡¯t been made up from overseas activity and there¡¯s no prospect of that happening¡±.

¡°Part of the problem will then be breach of bank covenants,¡± said Mr Rushforth, former chief auditor at the ³ÉÈËVRÊÓƵ Funding Council for England. ¡°You will have a very clear decision to be made by the governing body when they come to do the financial accounts ¨C these discussions are already happening ¨C with people talking to their auditors about whether they [the university] are a going concern. Because clearly if they keep trading when they know they are going bankrupt that opens them up [governing bodies] potentially to some legal liability.¡±

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Mr Rushforth added: ¡°If we get to the position where, let¡¯s say, a major institution goes bust, there is a very real difficulty for everybody.¡±

He highlighted the obstacles to transferring students to a different profile of university in the same city, or to a similar profile of university in a different city; the need for some entity to foot the bill for students¡¯ additional costs if they move; questions around what would happen to a failed university¡¯s pension liabilities; and issues around the impact for graduates with degrees from universities that no longer existed.

Mr Rushforth?added ¡°if nothing is done¡± by government in the event of an institutional failure, banks ¡°would take fright and that will probably put up the cost of credit for every institution in the sector¡±.

¡°In the event of failure there is no current framework that means priority is given to student interests. Instead it will be creditors that are put first,¡± Mr Rushforth said.

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¡°Nobody expects anybody to be bailed out. But there will have to be a [government] response because I think it would be really politically challenging to leave 20,000 students in limbo with nobody able to sort them out.¡±

Bob Rabone, a former chair of the British Universities Finance Directors Group, said breach of banking covenants by a university would lead at the very least to ¡°dialogue with the lender¡±, resulting in ¡°an agreement on financial performance improvements over an acceptable period to correct the breach¡±.

¡°Only in the almost unheard-of event that a path cannot be agreed, would the borrower?need to put in place arrangements that repay the borrowing,¡± he added.

Sector leaders highlight early signs of a fall in overseas student recruitment and warn that with a government review of the graduate visa route under way, ministers must not deepen the problems even further.

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Vivienne Stern, chief executive of Universities UK, said that while university leaders are ¡°doing things to right the ship¡­government should not be complacent¡±.

¡°Institutions are in this position not because they are poorly managed, but because a range of factors, some of which are in government¡¯s control, are combining to create an impossible operating environment,¡± she said.

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¡°Government¡¯s absolute responsibility must be, first, not to make things worse; second, to appreciate that should there be an institutional failure the consequences would be really serious, not just for the university and its students, but for the town or city that it¡¯s in.¡±

john.morgan@timeshighereducation.com