Major bank stands by college fighting for survival following second failed merger

A major high street bank will “remain supportive” of a cash-strapped college that owes it over £6 million, despite fears the college may collapse following the last-minute failure of a second merger attempt.

The future of City College Southampton, which is surviving on government bailouts, was thrown into doubt this week when Eastleigh College pulled out of its proposed merger after the Department for Education rejected its bid for funds from the Restructuring Facility. 

Its first attempt to join up with another provider – Southampton Solent University – fell through in 2017, following a recommendation from the Solent Area Review.

City College’s accounts for 2017/18 warned that if its second merger failed, it would “require a standalone application to be approved to ensure it is able to continue operations into 2019/20” and would have to “seek additional long-term funding from the ESFA in order to remain in existence in the long term”. 

The accounts also stated that the college has £6.1 million of bank loans outstanding with Santander on terms negotiated in 2009, which has 16 years remaining. 

The college’s “forecast” show that one of the loan covenants will be breached, requiring the entire loan to be repaid in a single year.

The accounts go on to say:  “Santander has verbally stated it will not take any action on the college as it continues to work towards a merger.”

At the time of going to press, Santander told FE Week it remains “supportive of the college” despite its second failed merger, and the bank will continue to “work closely with them, as they explore their options”. 

The reassurance follows fears the college could be the first provider to be placed into administration under the new insolvency regime, which came into effect on January 31 and which allows colleges to go bust for the first time.

The Department for Education has made clear that there will be no more long-term bailouts available to colleges following the introduction of the insolvency regime.

A  DfE spokesperson would not confirm if it was considering placing the college into administration, but said: “All bids for funding from the Restructuring Facility fund are assessed through a rigorous governance and approval criteria, including whether a college is financially sustainable in the long term.

“We are working with City College Southampton to ensure learners aren’t negatively affected.”

The college told FE Week it was not entering into administration, nor had it begun an Independent Business Review – the start of insolvency proceedings.

Sarah Stannard, principal of City College Southampton, said: “City College Southampton is reassured by the constructive conversations we are having with key stakeholders and their commitment to ensuring that there is robust further education provision in Southampton.”

Stannard was due to stand down following the college’s merger, which was meant to be finalised by March 31, and at which point Jan Edrich, principal of Eastleigh, would have headed up both colleges. 

City College Southampton has since confirmed Stannard will be staying put, while trying to reassure students, staff and parents that it is “business as usual”.

The college, which is rated “requires improvement” by Ofsted and has around 5,000 students, has seen its financial health deteriorate to “inadequate” in recent years.

Its accounts showed that it has agreed with Santander a £500,000 ongoing overdraft facility, “however, this is insufficient to cover the expected cashflow shortfall occurring during January, February and March 2019” and an application for an unknown amount of exceptional financial support from the DfE has been approved “enabling the college to continue in operation in the short term”.

The financial statement also shows that its cash deficit deepened from £257,000 to £585,000 in 2017/18, and its total comprehensive income was just £1.3 million.

The new college insolvency regime

The news of the failed merger with Eastleigh College, which has put City College Southampton in imminent danger of insolvency, came little over one month after the new insolvency regime was introduced, which set out that, for the first time, troubled colleges will be able to go bust.

The Department for Education has made clear in its new regime that colleges like Southampton, which has been surviving on government bailouts, will no longer be saved by long-term bailouts and will be placed into administration if they fail.

The insolvency regime, which came into effect on January 31, aims at making it clear how colleges will be managed if they become insolvent, at the same time as protecting existing learners.

Prior to a corporate insolvency, government may commission an Independent Business Review into the provider to assess the options available, since the Restructuring Facility funding is no longer to be available. Some lending banks already commission these as part of their normal course of business.

In the event that a college runs out of money, they must now give the DfE notice that they want to appoint an administrator. The DfE then has 14 days to decide if it wants to apply to court for an education administration order – for their own administrator. Then the administrator appointed by the court will be required to act to avoid or minimise disruption to the studies of the existing students.

Administrators would first seek to rescue the college as a going concern. If this fails, they would seek to transfer the business to another institution. In some cases, some or all students could be transferred to another provider, or the college may be kept going until existing students have completed their course. At the same time the education administrator would also balance the needs and rights of lenders and other creditors and realise assets for their benefit.

 

Alternative providers in Southampton

If City College Southampton does collapse, administrators could transfer its existing learners to other local providers. The college, which is located in the city centre, has four other sixth-form colleges within a three-mile radius: St Anne’s Catholic School & Sixth Form College, Bitterne Park Sixth Form, Itchen Sixth Form College and Richard Taunton Sixth Form College. Further away there is The Hamble Community Sports College and the Totton College.

St Anne’s Catholic School has an “outstanding” Ofsted rating and Bitterne has been ranked as “good” in its last inspection. Itchen and Richard Taunton both have a “requires improvement” rating.

Eastleigh College, a 20-minute car ride away from City College, could also be an alternative to learners. Located close to the city’s airport, the college was downgraded from “outstanding” to “good” by Ofsted earlier this year.