University of Canterbury will rely on its implicit government guarantee to meet payments to investors on its unrated 10-year bonds after the earthquakes scared off students, seriously denting the university's finances.

The university is in talks with the Tertiary Education Commission after warning it would fall into deficit next year and breach a TEC-imposed covenant on its NZDX-listed bonds requiring it to maintain a surplus-to-operating income ratio at no less than 3 per cent. University Vice-Chancellor Rod Carr says payments to bond holders are included in its forecast funding needs.

"The university's case for support envisages a return to surplus within five to seven years," Carr, a former deputy governor of the Reserve Bank, told BusinessDesk. "However, this will depend on student enrolments, which are the greatest driver of revenue."

Canterbury broke new ground in 2009, becoming the only university to tap investors via a debt sale. It sold $50 million of 10-year bonds that pay a coupon of 7.25 per cent until the interest rate is reset in December 2014.


The university relied on government funding for 43 per cent of its $164 million operating income in the first half, including funds for research. Student fees make up 26 per cent, according to its first-half accounts. The earthquakes saw a drop-off in enrolments, meaning student fees are forecast to miss budget estimates in what will be a multi-year impact. Insurance costs have also jumped.

"We have lost a whole pipeline of students," said Keith Longdon, the university's acting chief financial officer.

The university, which had 15,500 students enrolled this year, expects to lose about 20,000 full-time students over the next eight years. The number of first year students discontinuing or failing to complete study fell 25 per cent, international students by 30 per cent and continuing students 8 per cent.

Student tuition fees are $5 million below its 2011 forecast while operating costs are $12 million more than projected, partly reflecting a more than doubling of insurance costs to $6.2million from $2.5 million and a $1.8 million increase in energy costs, the university says.

The university continues to comply with its bond trust deed, said Richard McLoughlin, a business manager at Trustees Executors. "From the trustee's perspective they are complying and meeting their obligations but in a wider context there will be pressures later on."

The TEC has signalled it will provide a 'waiver' for the covenant breach.

"We are guaranteeing a lump-sum payment," said David Nicholson, the TEC's general manager of strategy, planning and information. "We're interested in Canterbury being a vital part of the university network" while "acting prudently" in its financial management.

The bonds last yielded 7.3 per cent on the NZDX, suggesting investors are pricing in little risk of default given the government in unlikely to allow a university to fail. Lincoln University, located 25 minutes from Christchurch, is the only other university not to have met its TEC funding criteria in recent times.


"There is so much support politically for the rebuild of Christchurch and the University of Canterbury is an important part of that puzzle so I would be surprised if given all the other support for the region the government tripped over for that amount of money," said Fergus McDonald, fixed income manager at Tyndall Investment Management.

The university wrote down the value of its property by $25 million following the September 4, 2010, earthquake and the full financial impact of the quakes may be as high as $58 million.

In the June 30 half-year report the university's land value stood at $97 million and building valuation was $503 million.

Canterbury's bond sale was also unusual because it gave investors a 'philanthropic' element, where they could waive principal and interest payments. Alumni were targeted in the sale.

Of the 827 holders of the $50 million of bonds, eight agreed to forego interest on $120,000 of the debt, including four who gifted $21,000 of bonds to a university foundation and one who made a bequest for $10,000 worth, Carr said in written answers to BusinessDesk questions.

Interest payments of the bonds amounted to less than 2 per cent of total income and the university has advised the NZX that payments will continue to be made, Carr said. "There is no scenario under which interest payments cannot be met and the university has eight years in which to arrange repayment or refinancing."

Canterbury is now investigating ways to cut its costs, including dipping into University Trust Funds and running a fundraising campaign to finance a scholarship programme. Despite land acquisitions in recent years, there is "no land of any significant value owned by the university that is currently considered surplus."

In October, the university said 24 of its 3,000 staff had accepted voluntary redundancy.

The university is assessing all of its courses though no decision has been made to trim the programmes because of the budget deficit, Carr said. "All colleges and service units have scrutinised budgets very thoroughly."

Final decisions will depend on enrolment numbers.

"They may offer less by volume but we're not aware they are cutting the span of their coverage," the TEC's Nicholson said. "It is important for a university to maintain its breadth."