Debt Management Guidelines
Summary
Debt financing, especially tax-exempt debt, provides a low-cost source of capital for the University to fund capital investments to achieve its mission and strategic objectives. Appropriate financial leverage serves a useful role and is considered a longterm component of the University’s balance sheet. Given that the University has limited debt repayment resources, management must prudently allocate the use of debt financing within the University. These guidelines provide the framework by which decisions will be made regarding the issuance of debt to finance particular capital improvements.
Authority
North Carolina General Statutes Chapter 116D Article 3 authorize the Board of Governors of the University of North Carolina (the Board) to issue special obligation bonds for improvements to the facilities of the University of North Carolina System. Prior to a bond issue, the Board designates the capital improvements financed as “special obligation bond projects” and the University’s Board of Trustees approves the issuance of special obligation bonds for those projects.
Criteria
The University’s debt capacity is a limited resource. Only projects that relate to
the mission of the University, directly or indirectly, will be considered for debt financing.
Projects financed will have received approval through the NC State Legislature
annual non-appropriated capital improvements bill and will have been designated as
“special obligation projects” by the North Carolina Board of Governors.
A project that has a related revenue stream (self-liquidating project) will receive
priority consideration. For these projects, the use of debt must be supported by an
achievable financial plan that includes servicing the debt, meeting any new or increased
operating costs, and provision for appropriate replacement and renovation costs. Other
projects funded by budgetary savings, gifts and grants will be considered on a case by
case basis.
Maintenance of Credit Rating
Maintaining a high credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. While the University’s decision to issue additional debt will be primarily focused on the strategic importance of the new capital improvement(s) the potential impact of a change in credit rating will also be reviewed. The University recognizes that external economic, natural, or other events may from time to time affect the creditworthiness of its debt. Nevertheless, the University is committed to ensuring that actions within its control are prudent. Management will provide the rating agencies with full and timely access to required information.
Methods of Sale
The standard methods of sale are competitive, negotiated and private placement. University management will evaluate each method of sale and determine the best type for each bond issue.
Financing Team Professionals
Selection of the financing team professionals will be done following guidance from the UNC Office of the President. Bond Counsel, Financial Advisor (if needed) and Underwriter pool will be selected using the RFP (request for proposals) method.
General Revenue Pledge
The University will utilize general revenue secured debt (available funds pledge) for all financing needs, unless for certain projects management desires to structure specific revenue pledges independent of general revenue projects. The general revenue pledge provides a strong, flexible security that captures the strengths of not only auxiliary and student related revenues, but of the University’s research programs. General revenue bonds price better than corresponding auxiliary or facilities and administrative cost recovery bonds. In addition, on general revenue debt, the University is not subject to operating or financial covenants and coverage levels imposed by the market and external constituents.
Refunding
Refunding and/or restructuring opportunities will be evaluated on a regular basis. Costs incurred by the refunding activity will be taken into consideration with a target of 3% present value savings. The University will also consider refinancing for other strategic reasons including the elimination of certain limitations, covenants, payment obligations or reserve requirements that reduce flexibility.
Types of Instruments
Tax-exempt debt – The University recognizes the benefits associated with taxexempt
debt, and therefore will manage the tax-exempt portfolio to maximize the use of
tax-exempt debt.
Taxable debt – The University will manage its debt portfolio to minimize its
taxable component. Unlike tax-exempt debt, taxable debt will not be considered a
perpetual component of the University’s liabilities. Taxable debt will be utilized to fund
projects ineligible for tax-exempt financing.
Commercial paper – The University recognizes that a commercial paper (CP)
program can provide low-cost working capital and provide bridge financing for projects.
However, as with other debt structures, the level of CP outstanding impacts the
University’s overall debt capacity. Commercial paper can provide the University with
interim financing for projects before gifts are received or in anticipation of a bond issue.
Variable rate debt – Variable rate debt is a desirable component of a debt portfolio
as it provides typically lower rates. The use of variable rate debt does expose the debt
portfolio to interest rate fluctuations. Therefore, the University will balance the mix of
variable and fixed rate debt so that variable is between 20%-50% of the total debt
portfolio and will only include variable in the debt portfolio when advantageous.
Derivatives – It is recognized that in managing a liability portfolio, the use of
derivative products can be appropriate and advantageous for the purposes of limiting
interest rate exposure and reducing debt service costs. The use of swaps will be employed
primarily to enhance the University’s financial strategy and to manage variable rate
exposure. Derivative products can help the University lock-in a favorable cost of capital
for a future project or to ensure a specific level of cash flow savings for a refinancing.
The University’s strategic objectives would determine the appropriate approach.
The University will evaluate potential derivative instruments through evaluation
of its variable rate allocation, market and interest rate conditions, and the compensation
for undertaking counterparty exposure. The University will evaluate each transaction
relative to counterparty risk, basis risk, and termination risk. No derivative transaction
will be undertaken that is not fully understood by the University or that imposes
inappropriate risk on the University.
Maturity and Debt Service
The useful life of the capital project financed will be taken into consideration when determining the length of financing. No capital project will be financed more than 120% of its useful life. Call features should be structured to provide the highest degree of flexibility relative to cost. Structure of debt service will take into consideration existing debt and future capital plans. In addition, the University’s amortization of debt service may be spread along the full yield curve depending on market conditions.
Disclosures and Compliance
Annually, the University will review compliance with covenants and requirements under outstanding bond indentures. The University will continue to meet its ongoing disclosure requirements in accordance with SEC rule 15c2-12. The University will submit financial reports, statistical data, and any other material events as required under outstanding bond indentures. The University will comply with arbitrage requirements on invested bond funds.
Use of Benchmarks and Debt Ratios
In order to maintain an understanding of the University’s standing in comparison to other like institutions, analysis using standard ratios and benchmarks must be made comparing the University to others in its peer group. This analysis can be used as an ongoing tool in determining trends, weaknesses and target strengths relating to the debt portfolio and the health of the institution. On a regular basis, the University will review its ratios and compare them to published benchmarks from the rating agencies and others in its peer group. The University’s Expendable Financial Resources to Debt ratio and the University’s Actual Debt Service to Operations ratio are important measures of financial performance and debt capacity.
Indirect Debt
The University understands that debt issued by affiliated foundations can have an
effect on the University’s bond rating. University management will take steps to be aware
of, and participate in, debt discussions and new borrowings undertaken by those affiliated
entities.
Debt Management Guidelines (PDF)