UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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II. DEBT STRATEGIES – 1...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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II. DEBT STRATEGIES – 4...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
                                           DEBT POLICY
II. DEBT STRATEGIES – 4...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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III. APPENDIX...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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III. APPENDIX ...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
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UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
                                        DEBT POLICY
VI. APPENDIX D – VARIABLE ...
UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
                                        DEBT POLICY
VI. APPENDIX D – VARIABLE ...
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  1. 1. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY PREFACE PURPOSE The University of North Carolina at Chapel Hill’s (“the University”) strategic and capital planning is a long-term process that is continuously reevaluated. The University recently adopted a Facilities Profile and 10-Year Capital Plan recognizing the need for additional academic and student life facilities to keep pace with programmatic expansion. To achieve the plan, the University will utilize a mix of funding sources including State funds (bonds and appropriations), University bonds, internal reserves, and philanthropy. To ensure the appropriate mix of funding sources is utilized, the University is implementing a debt policy. The policy will be continuously used by management as a tool to evaluate the University’s organizational and capital funding structure, the appropriate use of leverage, and internal lending mechanisms. Maintaining the debt policy is a long-term process, occasionally involving the issuance of debt. FIGURE 1. DEBT POLICY FRAMEWORK CAPITAL PLAN DEBT POLICY FACILITIES NEEDS  How much debt is appropriate?  What type of debt is needed?  How should debt be handled internally and externally to optimize University borrowings? UNIVERSITY DEBT INTERNAL SOURCES/ STATE BONDS/ PHILANTHROPY APPROPRIATIONS CONTENTS I. INTRODUCTION II. DEBT STRATEGIES 1. MISSION-BASED CAPITAL PLANNING 2. CORE RATIOS 3. DEBT INSTRUMENTS 4. INTERNAL AND EXTERNAL DEBT REPAYMENT III. APPENDIX A – DEBT PRACTICES IV. APPENDIX B – CAPITAL PLAN PROJECTIONS V. APPENDIX C – CORE RATIO ANALYSIS VI. APPENDIX D – VARIABLE RATE ALLOCATION ANALYSIS Page 1
  2. 2. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY I. INTRODUCTION APPROACH To fulfill its mission, the University will need to make ongoing strategic capital investments, driving capital decisions that impact the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral component of the University’s assets, debt is viewed to be a continuing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low cost source of capital for the University to fund capital investments in order to achieve its mission and strategic objectives. University Mission “To serve all the people of the State, and indeed the nation, as a center for scholarship and creative endeavor. The University exists to teach students at all levels in an environment of research, free inquiry, and personal responsibility; to expand the body of knowledge; to improve the condition of human life through service and publication; and to enrich our culture." The debt objectives below, combined with management judgment, provide the framework by which decisions will be made regarding the use and management of debt. The debt policy and objectives are subject to re-evaluation and change over time. OBJECTIVES 1. Identify projects eligible for debt financing. Using debt to fund mission critical projects will ensure that debt capacity is optimally utilized to fulfill the University’s mission. Projects that relate to the core mission will be given priority for debt financing; projects with associated revenues will receive priority consideration as well. 2. Maintain the University’s favorable access to capital. Management’s determination of the timing of capital projects will not be compromised by the University’s access to capital sources, including debt. Management will utilize and issue debt in order to ensure timely access to capital. 3. Limit risk of the University’s debt portfolio. The University will manage debt on a portfolio, rather than a transactional or project-specific, basis. The University’s continuing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts. 4. Manage the University’s credit to maintain the highest acceptable credit rating. Maintaining the highest acceptable credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit with the bond rating agencies; however, the attainment or maintenance of a specific rating is not an objective of this policy. Page 2
  3. 3. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY I. INTRODUCTION For the University to achieve the above objectives, it will adopt debt strategies and procedures relating to both the external and the internal management of debt and interest. It is intended for these strategies to be reviewed and reassessed periodically by management. DEBT STRATEGIES 1 MISSION BASED CAPITAL PLANNING. Provide framework with link to mission to evaluate and prioritize projects eligible for debt financing. 2. CORE RATIOS. Adopt a set of core financial ratios to guide capital planning and ensure central oversight of University-wide leverage levels. 3. FINANCIAL INSTRUMENTS. Provide the University with access to appropriate financing sources, including debt and liability management strategies debt based on borrowing and portfolio management needs. 4. EXTERNAL AND INTERNAL DEBT REPAYMENT. De-link external and internal debt repayment, including adoption of internal lending policies. In addition to the debt strategies the University has adopted to support its objectives, the University will also incorporate debt management practices (see Appendix A). These practices will be updated periodically and are intended to be resource for management in determining structuring, marketing, and administrative elements of the debt program. Page 3
  4. 4. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 1. MISSION BASED CAPITAL PLANNING The University has substantial though not unlimited debt capacity at management’s desired credit rating level. Management will allocate the use of debt financing within the University to include the prioritization of debt resources among all uses, including plant and equipment financing, academic projects, and projects with University-wide impact. Generally, the following guidelines will be used, although they are not intended to be all-inclusive. FIGURE 2. DEBT ALLOCATION MATRIX Important Critical ec to Future na Quadrant 3 Quadrant 1 m ro Less Important Very fr to Future Important eP a l i Quadrant 4 Quadrant 2 cn an iF Mission 1. Only projects that relate to the mission of the University, directly or indirectly, will be considered for debt financing. 2. A project that has a related revenue stream or can create budgetary savings will receive priority consideration. Every project considered for financing must have a defined, supportable plan of costs approved by management. 3. State funding and philanthropy are expected to remain major sources of financing for the University’s plant investments. In assessing the possible use of debt, all other financing and revenue sources will be considered. State appropriations/bonds, philanthropy, project- generating revenues, research facilities and administration cost reimbursement, expendable reserves, and other sources are expected to finance a portion of the cost of a project. Debt is to be used conservatively and strategically. 4. The University will consider other funding opportunities (e.g., joint ventures, real estate development, etc.) when appropriate and advantageous to the University. Opportunities and financing sources will be evaluated within the context of the Debt Policy. 5. Federal research projects will receive priority consideration for external debt financing due to partial reimbursement of operating expenses (including the interest component of applicable debt service) of research facilities. Page 4
  5. 5. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 2. CORE RATIOS The University will establish guidelines for overall debt using a select number of financial ratios. These ratios will be derived from the financial statements, and should be consistent with some of the measures used by the marketplace. Following are the ratios and corresponding guidelines. They will be calculated and reported annually and when new debt is issued, and will be revised to reflect any changes in accounting standards. BALANCE SHEET RATIO - UNRESTRICTED FUND BALANCE TO DEBT (X COVERAGE) POLICY LIMIT. The Unrestricted Fund Balances to Debt Ratio indicates one of the key determinants of near to medium term financial health by measuring the availability of unrestricted funds to cover debt should the University be required to repay all its outstanding obligations immediately. Although numerous balance sheet measures exist, this ratio is the most appropriate and informative to evaluate leverage versus funds that could be expended by the University. UNRESTRICTED FUND BALANCES (CURRENT FUND, QUASI-ENDOWMENT, PLANT) TOTAL ADJUSTED UNIVERSITY DEBT1 The target ratio is established to maintain the University’s comparative debt coverage level among peer institutions and provide sufficient buffer against possible declines in coverage from decreases in quasi endowment and temporary investment pool balances. The ratio is also a key determinant of the University’s credit rating. The guideline for this ratio is to be no less than .9 times coverage. STATEMENT OF ACTIVITIES RATIO – DEBT TO OPERATIONS (%) POLICY LIMIT. This ratio measures the University’s ability to repay debt service associated with all outstanding debt and the impact on the overall budget. The target for this ratio is intended to maintain the University’s long-term operating flexibility to fund new initiatives. PRINCIPAL AND INTEREST ON NOTES AND BONDS TOTAL CURRENT FUND EXPENDITURES The measure is based on aggregate current fund expenses as opposed to current fund revenues because expenses typically are more stable and better reflect the operating size of the University. Management recognizes that a growing expense base would make this ratio appear more attractive. The guideline for this ratio is not to be greater than 4%. If more than 4% of the University’s annual budget were committed to debt service expense, flexibility to devote resources to fund other objectives could be reduced. STATEMENT OF ACTIVITIES RATIO – AVERAGE DEBT SERVICE COVERAGE (X COVERAGE) POLICY LIMIT. The debt service coverage ratio measures the University’s ability to repay existing and additional indebtedness from current fund operations. The guideline for this ratio ensures that over a 2 year period sufficient operating cash flow is achieved in order to issue and repay additional debt. 2-YEAR AVERAGE EXCESS CURRENT FUND REVENUE 2-YEAR AVERAGE PRINCIPAL AND INTEREST EXPENSE The guideline for this ratio also incorporates the required cash flow from operations necessary to generate current fund returns adequate to support the University’s increasing debt burden as measured by Ratio 1. The debt policy limit for this ratio is to be no less than 1.5 times. 1 Excludes EPA debt which totaled $32.6 million at 6/30/02. Page 5
  6. 6. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 3. DEBT INSTRUMENTS Under the guidance of the Division of Finance and Administration (F&A), the University will pool debt and in doing so, manage debt on a portfolio basis to minimize cost and manage volatility. FIGURE 3. TAX-EXEMPT AND TAXABLE DEBT Capital Needs Tax-Exempt Debt Taxable Debt Commercial Paper Variable Rate Debt Variable Rate Debt Fixed Rate Debt Fixed Rate Debt Uses: non tax-exempt eligible projects, most flexible debt financing vehicle. Uses: tax-exempt eligible projects, academic facilities, research facilities, student life, etc. Maximize Minimize TAX-EXEMPT DEBT The University recognizes the benefits associated with tax-exempt debt, and therefore will manage the tax-exempt portfolio to maximize the portion of tax-exempt debt outstanding under the Debt Policy. 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 an external bond issue. Project-related CP provides the Central Bank (see Debt Strategies 4 – External and Internal Debt Repayment) with an easily accessible low-cost source of funding to manage its cash balances and provide continuous access to capital to the divisions, regardless of whether an external financing is imminent. Project-related CP will be treated as any other form of debt and subject to the Debt Policy guidelines. 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 or for those projects for which the University wants to preserve maximum operating flexibility; however, the University will manage its overall debt portfolio and total financing sources in order to minimize (or eliminate) the need for taxable debt. Periodically and when any new Page 6
  7. 7. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 3. DEBT INSTRUMENTS debt is issued, the University will determine its aggregate taxable needs and manage the taxable debt portfolio, if any based on the aggregate need and desired flexibility. FIGURE 4. DERIVATIVES TO MANAGE VARIABLE ALLOCATION PORTFOLIO DESIRED PORTFOLIO ALLOCATION SWAPS ALLOCATION Rate Debt Variable Decrease Variable Rate Exposure Fixed Rate Debt Increase Variable Rate Exposure INTEREST RATE SWAPS The use of swaps will be employed primarily to manage the University’s variable rate exposure. The University will utilize a framework to evaluate potential derivative instruments through evaluation of its variable rate allocation, market and interest rate conditions, and the compensation for undertaking counterparty exposure. In addition, the University will incorporate the cost/benefit of any derivative instrument. Under no circumstances will a derivative transaction be utilized that is not fully understood by the University or that imposes inappropriate risk on the University. FIXED VERSUS VARIABLE ALLOCATION Due to the financing flexibility and typically low interest cost associated with variable rate debt, it is desirable to maintain a portion of the University’s aggregate debt on a floating rate basis. However, variable rate debt also introduces volatility to the University’s debt service obligations. Therefore, the University will balance the mix of variable and fixed rate debt according to a target guideline of up to 50% variable (see Appendix D), although the actual percentage for debt outstanding will fluctuate from time-to-time due in part to financing needs, utilization of the commercial paper program, and prevailing market interest rates. Page 7
  8. 8. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 4. EXTERNAL AND INTERNAL DEBT REPAYMENT FINANCE AND ADMINISTRATION AS A CENTRAL BANK Since it is acknowledged that debt will remain a perpetual component of the University’s capitalization and will be managed by the Division of Finance and Administration (F&A), the Office of Associate Vice Chancellor for Finance will structure transactions, provide funds and develop repayment schedules for individual units. In this regard, F&A is viewed as a central bank for financing of projects for and across divisions. The University will pool all debt and act as a central source of funds that borrows from the markets and receives capital funds from other sources and makes funds available to the divisions to achieve their objectives. As mentioned above, debt will remain a long-term component of the University’s balance sheet and division leaders will seek funding for projects from the central bank subject to the debt policy. Deans and Vice Chancellors are not concerned about the source of funds to finance their projects; they are interested in the access to capital, the project ranking criteria, the impact on the current budget, and the predictability of future payments. Therefore, it is desirable to decouple the source of financing (e.g., prevailing fixed or variable rates, synthetic debt, etc) from the use of funds to finance capital projects to the greatest extent possible. Project financing decisions will be made based on the Mission Based Capital Planning strategy continued in the Debt Policy, and not based on the timing of specific transactions. SINGLE UNIVERSITY-WIDE INTEREST RATE – BLENDED RATE The University will charge a single interest rate for loaned proceeds regardless of use or source. The single University-wide rate will be adjusted periodically based on the University’s blended cost of capital on all external debt. FIGURE 5. BLENDED RATE INVESTORS Fixed Rate Variable Rate Debt Debt CENTRAL BANK Average University Borrowing Rate – Blended Rate DIVISION DIVISION DIVISION DIVISION The blended interest rate will achieve the following objectives: • Provide a consistent source of capital to divisions with a predictable and consistent cost of capital. A single interest rate for divisions will make year-to-year budgeting easier for the divisions, since the cost of capital is established at the beginning of the year and is somewhat insulated from changes in market interest rates. • Align the interests of the University with the divisions. Since debt will be managed on a portfolio basis under debt policy guidelines, transactions will be structured to benefit the entire University, which will benefit the blended rate charged to all divisions. Page 8
  9. 9. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY II. DEBT STRATEGIES – 4. EXTERNAL AND INTERNAL DEBT REPAYMENT • Timing of borrowing for projects will not impact the rate borne by the division. The University will time and pool debt issuance for multiple projects to achieve the most economic transactions. The blended interest rate will be influenced by a number of factors: • Any savings derived from refinancing of existing debt will lower the blended rate, benefiting all borrowers. • For purposes of the University’s variable rate debt, the blended rate will assume a variable rate based on a multi-year moving average of the University’s external short-term borrowing cost. • The University may elect to reserve funds collected in order to minimize year-to- year adjustments in the blended rate. The University’s blended rate for fiscal 2001-2002 is 5.03%. Page 9
  10. 10. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY III. APPENDIX A - DEBT MANAGEMENT PRACTICES GENERAL REVENUE PLEDGE The University will utilize general revenue secured debt 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 which 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 indirect 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. The University will use revenue-specific bonds for those projects that are subsidized externally or not funded by unrestricted current funds of the University. These bonds (e.g. EPA bonds) will be structured to accommodate requirements of the pledged revenue stream or management desires to keep a project independent from other general revenue funded projects. STRUCTURE (MATURITY, ETC.) The University will employ maturity structures that correspond with the life of the facilities financed, subject to System and State limitations. As market dynamics change, maturity structures should be reevaluated. Call features should be structured to provide the highest degree of flexibility relative to cost. METHODS OF SALE The University will consider any method of sale. Negotiated and competitive bond offerings will be considered on an individual transaction basis. For those transactions that represent a new or non-traditional pledge of University revenues, the University generally will consider negotiated methods of sale over competitive sales. REFUNDING TARGETS The University will continuously monitor its outstanding tax-exempt debt portfolio for refunding and/or restructuring opportunities. For a stand-alone refunding, the University will enter into a transaction that produces at least 3-5% present value savings (based on refunded bonds), with this threshold higher for those transactions with a long escrow. The University also will consider a refinancing if it relieves the University of certain limitations, covenants, payment obligations or reserve requirements that reduce flexibility. The University will also consider refinancing certain obligations within a new money offering even if savings levels are minimal in order to consolidate debt into the general revenue pledge, and/or reduce the administrative burden and cost of managing many small outstanding obligations. DISCLOSURE The University will continue to meet its ongoing disclosure requirements in accordance to 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 attempt to provide all relevant investor information on its website. ARBITRAGE Page 10
  11. 11. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY III. APPENDIX A - DEBT MANAGEMENT PRACTICES Annually, the University will comply with arbitrage requirements on invested bond funds. The implementation of tax-exempt CP will reduce the University’s ongoing investment of earnings restricted bond funds. BOND PROCEED INVESTMENT The University will continue to invest bond-funded construction funds, capitalized interest funds, and costs of issuance funds appropriately to achieve the highest return available under arbitrage limitations. When sizing bond transactions, the University will consider funding on either a net or gross basis. LIQUIDITY The University will provide liquidity support for variable rate debt and commercial paper by purchasing external support from a third-party or parties or from internal liquid reserves. While providing internal liquidity support is most economic, the University should not be constrained from investing funds long-term in order to maintain liquidity requirements. The University regularly will review its liquidity requirements and sources make any adjustments as necessary or desired. Page 11
  12. 12. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY IV. APPENDIX B – CAPITAL PLAN PROJECTIONS PROJECTED DEBT REQUIREMENTS The development schedule for the University’s capital plan currently requires University debt/ self-liquidating funds to finance approximately $436 million in projects through fiscal 2010. The University anticipates financing the projects through a mix of tax-exempt commercial paper and long-term general revenue bonds financing. Current projections assume starting construction for bond funded projects over the next 6 years, however the timing of any debt issuance will be subject to the capital plan, prevailing market conditions, and availability of commercial paper. The projects currently anticipated for debt financing are: FIGURE 6. PROJECTED PROJECT FUNDING1 Project Debt Requirement Administrative Office Building 8,900,000 Bell Tower Parking 25,150,000 Cameron Parking 7,500,000 Cobb Residence Hall 9,884,000 Cogeneration Facility-Replace Boiler #5 6,151,500 Connor Alexander Winston Dorms 10,500,000 Frank Porter Graham Student Union Addition 14,153,300 Genetic Medicine Building 51,150,000 Hardrails-Health Parking Deck I 485,000 Hinton James Renovations 15,000,000 Manning Drive Boiler Plant 13,212,360 McIver, Kenan & Alderman Residence Halls 10,741,000 Morrison Renovations 15,000,000 Ramshead 51,847,785 Residence College- Phase II 46,500,000 School of Nursing Addition 4,504,000 School of Public Health 15,598,300 Science Complex Phase I 16,550,000 Science Complex Phase II 10,000,000 Science Complex Phase III 67,200,000 Stone Center 6,000,000 Student Family Housing 30,000,000 Total Debt Funding Requirements 436,027,245 The debt required for the capital plan will increase University debt from $380 million in fiscal 2002 to a projected $626 million in Fiscal 2006. 1 Preliminary. Page 12
  13. 13. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY IV. APPENDIX B – CAPITAL PLAN PROJECTIONS FIGURE 7. PRO-FORMA DEBT 1998 1999 2000 2001 2002 2003 2004 2005 2006 241,13 Total Existing University Debt2 3 249,598 268,668 356,134 380,813 366,264 347,312 328,028 308,198 Cumulative Capital Plan Requirements 31,087 166,142 261,259 318,009 241,13 Total Debt 3 249,598 268,668 356,134 380,813 397,351 513,454 589,287 626,207 PROJECTED DEBT SERVICE REQUIREMENTS University annual debt service requirements are expected to grow from $30 million in fiscal 2003 to approximately $56 million by fiscal 2007. FIGURE 8. PRO-FORMA DEBT SERVICE 2003 2004 2005 2006 2007 Total Existing University Debt Service2 28,002 31,984 32,017 32,048 31,804 Capital Plan: 1,759 7,456 16,356 20,880 24,315 Total Debt Service 29,761 39,440 48,373 52,928 56,119 2 Excludes U.S. EPA Project Bonds, Series 1991 and 1996. Capital Appreciation Bonds’ values are assumed as of 6/30/02. Page 13
  14. 14. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY V. APPENDIX C – CORE FINANCIAL RATIO ANALYSIS RATIO 1 - UNRESTRICTED FUND BALANCE TO DEBT (X COVERAGE) The graph below represents the median unrestricted resources to debt ratio by rating category and highlights the strong correlation of this balance sheet ratio to rating level. Limiting the University’s unrestricted resources to debt ratio to at least .9 times coverage ensures the University’s leverage levels remains strong compared to industry benchmarks and other Aaa and Aa rated universities. FIGURE 9. POLICY LIMIT VS. MOODY’S MEDIANS 1.8 Aa - 1.673X a 1.6 1.4 1.2 X Coverage 1 De P y Lim - .9X bt olic it 0.8 Aa - .886X 2 Aa - .67X 3 0.6 A1 - .708X A2 - .493X 0.4 0.2 A3 - .189X 0 A3 A2 A1 Aa3 Aa2 Aa1* Aaa * Carolina is the only Aa1 rated public university. Moody’s does not report a median. FY 2001 ANALYSIS. For fiscal year 2001, the University’s unrestricted fund balance to debt ratio is calculated at 1.14 times coverage based on the University’s financial statements. 1994 1995 1996 1997 1998 1999 2000 2001 1.20 1.22 1.28 1.24 1.38 1.39 1.46 1.14 The University’s ratio of 1.14 times is between Moody’s Aaa rated median of 1.67 times and Aa2 rated median of .89 times. Compared with peer institutions, Carolina’s FY 2001 ratio exceeds NC State’s ratio (.84x) and the University of Washington (1.38x) and is lower than the University of Virginia (1.79x), the University of Michigan (3.23x), and Duke University (14.1x). FIGURE 10. RATIO 1 PEER ANALYSIS Unrestricted Resources to Debt UNRESTRICTED RESOURCES [1] Carolina TOTAL DEBT 3.50 Debt Policy Limit Moody's Aaa-Median 3.00 Moody's Aa2-Median 2.50 X Coverage 2.00 1.67 1.50 1.00 0.89 0.9 0.50 - 1994 1995 1996 1997 1998 1999 2000 2001 Duke NC State University of University of University of University University Michigan Virginia (Aaa) Washington (Aa1) (A1) (Aaa) (Aa2) Page 14
  15. 15. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY V. APPENDIX C – CORE FINANCIAL RATIO ANALYSIS RATIO 2 – DEBT SERVICE TO CURRENT FUND EXPENDITURES (%) FY 2001 ANALYSIS. For fiscal year 2000-2001, the University’s debt service to operations was 2.12%. The University’s average ratio since 1994 is 2.15%. 1994 1995 1996 1997 1998 1999 2000 2001 2.54% 2.26% 2.31% 2.19% 1.74% 1.84% 2.17% 2.12% While the University’s debt policy limit is higher than peer institutions and Moody’s medians, it is important to recognize that most of the peer institutions are commencing substantial capital improvement programs as well. In addition, the calculation of this ratio for many of the peer institutions is much lower due to the budget impact of significant health care operations. FIGURE 12. RATIO 2 PEER ANALYSIS 6.00% UNC Debt Policy Limit 5.00% Moody's Aaa-Median % of Current Fund Expenditures Moody's Aa2-Median 4.00% 4.00% 3.00% 2.80% 2.00% 1.90% 1.00% 0.00% 1994 1995 1996 1997 1998 1999 2000 2001 Du ke NC Sta te University of Un rsity of Un rsity of ive ive University Un rsity ive Michigan Virginia Wash tgon in (Aa 1) (A1) (Aaa ) (Aaa) (Aa2) RATIO 3 – AVERAGE DEBT SERVICE COVERAGE (X COVERAGE) FY 2001 ANALYSIS. For fiscal year 2000-2001, the University’s average debt service coverage was 2.19 times. 1995 1996 1997 1998 1999 2000 2001 2.09 2.13 2.18 1.92 1.89 2.22 2.19 The limit for this ratio demonstrates the University’s commitment to maintaining a strong operating performance. Especially as the University issues new debt, and refinances existing debt, under the general revenue pledge, which does not require debt service coverage covenants. FIGURE 13. RATIO 3 PEER ANALYSIS Page 15
  16. 16. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY V. APPENDIX C – CORE FINANCIAL RATIO ANALYSIS Carolina Average Anual Debt Service Coverage Debt Policy Limit 2-YEAR AVERAGE NET CURRENT FUND REVENUE Moody's Aaa-Median 2-YEAR AVERAGE DEBT S ERVICE Debt Service Coverage (x Coverage) 4 Moody's Aa2-Median 3.5 3.50 3 2.5 2 1.70 1.5 1.50 1 0.5 0 1995 1996 1997 1998 1999 2000 2001 DukeUnive rsity NC Sta te University of Unive rsity of University of (Aa1) University (A1) Michiga (Aa ) n a Virginia (Aa ) a Wa shington (Aa 2) Page 16
  17. 17. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY VI. APPENDIX D – VARIABLE RATE ALLOCATION ANALYSIS Variable rate debt provides opportunity for the University to lower its borrowing costs; however, the associated risks of exposure to variable rate debt require a limit on its allocation within the University’s debt portfolio of no more than 50% of aggregate debt, net of derivatives. As the University utilizes its commercial paper program, there will be increased variance in the variable rate allocation. 70% 60% Debt Policy Limit 50% 40% 2000 30% 1997 1999 2002 1998 2001 20% 1996 1995 10% 0% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Total Debt Outstanding ($000) FIGURE 15. HISTORICAL VARIABLE RATE ALLOCATION In creating a target for variable rate debt exposure, the University must evaluate three distinct types of risk and assess the risk tolerance of the Central Bank and the operating units. The three risks are: 1. liquidity risk, 2. budgetary risk, and 3. overall cost of funds risk. The three types of risk may be distinguished by the time horizon over which they occur and the impact to the University. The risk tolerance of the Central Bank is likely to be greater than any single operating unit, as risk tolerances among the various units may differ. LIQUIDITY RISK. The most immediate risk of variable-rate debt is the associated liquidity requirement. Holders of variable rate debt may put the debt back to the liquidity provider, the University’s, on very short notice (e.g., one week for a weekly reset variable rate demand note (VRDN) or daily for a CP program), and the University must be able to provide funds to the investors at that time. There are two ways the University can manage this risk. The first is to pay for an external liquidity facility. While this removes liquidity risk, the premium charged by the provider adds to the borrowing cost. The second is to provide self-liquidity and maintain liquid cash and investments which are sufficient to extinguish all underlying variable rate debt and still provide sufficient operating liquidity. The maximum variable rate debt exposure supported by internal liquidity should be the level at which the liquidity requirement first impacts investment policy. Page 17
  18. 18. UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL DEBT POLICY VI. APPENDIX D – VARIABLE RATE ALLOCATION ANALYSIS BUDGETARY RISK. Budgetary risk is a short-term risk that variable rates will rise above those projected for the budget year or current funding cycle. The impact of higher-than-anticipated rates is that funding must be diverted from other uses to pay interest. This impact is considered on a University-wide and on an individual school and division level. The ability for the University to absorb shifts in short-term rates is greater than that of individual divisions. OVERALL COST OF FUNDS. Overall cost of funds risk is a long-term risk that variable rates will rise above the level of the University’s risk tolerance and increase interest costs throughout the term of the debt. FIGURE 16. HISTORICAL VARIABLE VS. FIXED RATES 8.00% 7.00% 6.00% 5.00% 5.03% 4.00% 3.00% 2.00% Long-T erm Rate - Mdy 20-AA Index 1.00% Short-T erm Rate - BMA based + 30 LOC & Rmktg Current Blended Rate 0.00% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 The University will continuously re-evaluate its existing variable rate allocation under debt policy guidelines. Page 18

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