Despite the lack of media attention, the government’s introduction of the college insolvency regime now being tested on Hadlow College is, as I’ve previously described, a watershed moment.
What some well-placed people have since told me is that they agree the government can’t guarantee colleges survive with never-ending bailouts, but they fear the unknowns.
Once the insolvency law kicks-in and the accountants literally take charge, will communities lose assets and access to courses for future generations?
Another significant unknown is how the banks will respond, or specifically Lloyds and Barclays, who account for the majority of long-term loans.
In the last decade many colleges took out multi-million pound loans with the two banks to help finance ambitious construction schemes.
The lending terms included strict rules known as covenants, such as maintaining sufficient cash reserves, rules which many have since broken.
This has left colleges forced to accept higher interest rates with other unfavourable terms.
Others, like Stoke-on-Trent College, persuaded the government that it would save public money in the long-term by using the Treasury restructuring funds to simply pay the £9 million loan back plus close to £2 million in loan break costs.
But as reported in FE Week, the balance of power seems to have now shifted away from the banks with the introduction of the insolvency regime.
In what appears to be a case of irresponsible lending, Lloyds gave Bradford College a whopping £40 million in several unsecured loans.
Presumably, by the time the loans had all been drawn-down in 2014, both the college principal and bank executive assumed the government would ultimately step in if there was any risk to the repayments.
That all changed with the introduction of the insolvency regime earlier in the year.
When the college broke the loan covenant the DfE did not waste the opportunity to remind the bank they might now lose their entire £40 million in an insolvency scenario, because it was an unsecured loan.
In the event, a complex deal was agreed in the days before the introduction of the insolvency regime.
The bank gifted £10 million by writing it off from the £40 million loan and the DfE used restructuring funds to reduce the debt by a further £10 million.
They also agreed to split the £5.6 million loan break costs.
In the short-term, the threat of insolvency will, as it has already been proven with Bradford College, weaken the banks’ negotiating position.
But longer-term it could cause colleges bigger problems when they are renegotiating loans, mortgages or are in the market for investment funds.
In addition to higher interest rate payments banks will want more security over the college properties for their loans.
And next time the bank might choose not to gift funds and instead take their chances as a creditor of failed college.
So, the next couple of years will prove to be a financial minefield for colleges, not just in terms of government investment, but how banks respond to a shift in the strength of their negotiating position.