POL 07.35.01 - Debt Management Policy

About this Policy

Authority:
Board of Trustees
Responsible Office:
Vice Chancellor for Finance and Administration
Date Established:
02-16-2018
Last Revised:
11-11-2022

1. INTRODUCTION

1.1 The University of North Carolina at Pembroke (“UNCP”) views its debt capacity as a limited resource that should be used, when appropriate, to help fund the capital investments necessary for the realization of UNCP's mission and, consequently, the successful implementation of UNCP's strategic vision to challenge students to embrace difference and adapt to change, think critically, communicate effectively, and become responsible citizens. UNCP recognizes the important role that debt-related strategies may play as it makes the necessary investments in its infrastructure in order to become and remain the destination institution for dedicated students seeking challenging academic programs, engaged faculty and a vibrant campus culture.

1.2 This Policy has been developed to assist UNCP's efforts to manage its debt on a long-term, portfolio basis and in a manner consistent with UNCP's stated policies, objectives and core values. Like other limited resources, UNCP's debt capacity should be used and allocated strategically and equitably.

1.3 Specifically, the objective of this Policy is to provide a framework that will enable UNCP's Board of Trustees (the “Board”) and finance staff to:

1.3.1. Identify and prioritize projects eligible for debt financing;

1.3.2. Limit and manage risk within UNCP's debt portfolio;

1.3.3. Establish debt management guidelines and quantitative parameters for evaluating UNCP's financial health, debt affordability and debt capacity;

1.3.4. Manage and protect UNCP's credit profile in order to maintain UNCP's credit rating at a strategically optimized level and maintain access to the capital markets; and

1.3.5. Ensure UNCP remains in compliance with all of its post-issuance obligations and requirements.

1.4 This Policy is intended solely for UNCP's internal planning purposes. The Vice Chancellor for Finance and Administration will review this Policy annually and, if necessary, recommend changes to ensure that it remains consistent with University's strategic objectives and the evolving demands and accepted practices of the public higher education marketplace. Proposed changes to this Policy are subject to the Board's approval. Attaining or maintaining a specific credit rating is not an objective of this Policy.

2. AUTHORIZATION AND OVERSIGHT

2.1 UNCP's Vice Chancellor for Finance and Administration is responsible for the day-to-day management of UNCP's financial affairs in accordance with the terms of this Policy and for all of UNCP's debt financing activities. Each University financing will conform to all applicable State and Federal laws.

2.2 The Board will consider for approval each proposed financing in accordance with the requirements of any applicable State law.

3. PROCESS FOR IDENTIFYING AND PRIORITIZING CAPITAL PROJECTS REQUIRING DEBT

3.1 Only projects that directly or indirectly relate to the mission and vision of UNCP will be considered for debt financing.

3.1.1. Self-Liquidating Projects – A project that has a related revenue stream (self-liquidating project) will receive priority consideration. Each self-liquidating project financing must be supported by an achievable plan of finance that provides, or identifies, sources of funds, sufficient to (1) service the debt associated with the project, (2) pay for any related infrastructure improvements, (3) cover any new or increased operating costs and (4) fund appropriate reserves for anticipated replacement and renovation costs.

3.1.2. Energy Conservation Projects – Each energy conservation project financing must provide annual savings sufficient to service the applicable debt and all related monitoring costs.

3.1.3. Other Projects – Other projects funded through budgetary savings, gifts and grants will be considered on a case-by-case basis. Any projects that will require gift financing or include a gift financing component must be jointly approved by the Vice Chancellor for Finance and Administration and the Vice Chancellor for Advancement before any project-restricted donations are solicited. The fundraising goal for any project to be financed primarily with donations should also include, when feasible, an appropriately-sized endowment for deferred maintenance and other ancillary ownership costs. In all cases, institutional strategy, and not donor capacity, must drive the decision to pursue any proposed project.

4. BENCHMARKS AND DEBT RATIOS

4.1 Overview

4.1.1 When evaluating its current financial health and any proposed plan of finance, UNCP takes into account both its debt affordability and its debt capacity. Debt affordability focuses on UNCP's cash flows and measures UNCP's ability to service its debt through its operating budget and identified revenue streams. Debt capacity, on the other hand, focuses on the relationship between UNCP's net assets and its total debt outstanding.

4.1.2 Debt capacity and affordability are impacted by a number of factors, including UNCP's enrollment trends, reserve levels, operating performance, ability to generate additional revenues to support debt service, competing capital improvement or programmatic needs, and general market conditions. Because of the number of potential variables, UNCP's debt capacity cannot be calculated based on any single ratio or even a small handful of ratios.

4.1.3 UNCP understands, however, that it is important to consider and monitor objective metrics when evaluating UNCP's financial health and its ability to incur additional debt. To that end, UNCP has identified three key financial ratios that it will use to assess its ability to absorb additional debt based on its current and projected financial condition:

4.1.3.1. Debt to Obligated Resources

4.1.3.2. Five Year Payout Ratio

4.1.3.3. Expendable Resources to Debt

4.1.3.4. Debt Service to Operating Expenses

4.1.4 Note that the selected financial ratios are also monitored as part of the debt capacity study for The University of North Carolina delivered each year under Article 5 of Chapter 116D of the North Carolina General Statutes (the “UNC Debt Capacity Study”), which UNCP believes will promote clarity and consistency in UNCP's debt management and planning efforts.

4.1.5 UNCP has established for each ratio a floor or ceiling target, as the case may be, with the expectation that UNCP will operate within the parameters of those ratios most of the time. To the extent possible, the policy ratios established from time to time in this Policy should align with the ratios used in the report UNCP submits each year as part of the UNC Debt Capacity Study. The policy ratios have been established to help preserve UNCP's financial health and operating flexibility and to ensure UNCP is able to access the market to address capital needs or to take advantage of potential refinancing opportunities.

4.1.6 UNCP recognizes that the policy ratios, while helpful, have limitations and should not be viewed in isolation of UNCP's strategic plan or other planning tools. In accordance with the recommendations set forth in the initial UNC Debt Capacity Study delivered April 2016, UNCP has developed as part of this Policy specific criteria for evaluating and, if warranted, approving critical infrastructure projects even when UNCP has limited debt capacity as calculated by the UNC Debt Capacity Study or the benchmark ratios in this Policy. In such instances, the Board may approve the issuance of debt with respect to a proposed project based on one or more of the following findings:

4.1.6.1. The proposed project would generate additional revenues (including, if applicable, dedicated student fees or grants) sufficient to support the financing, which revenues are not currently captured in the benchmark ratios.

4.1.6.2. The proposed project would be financed entirely with private donations based on pledges already in hand.

4.1.6.3. The proposed project is essential to the implementation of one of the Board's strategic priorities.

4.1.6.4. The proposed project addresses life and safety issues or addresses other critical infrastructure needs.

4.1.6.5. Foregoing or delaying the proposed project would result in significant additional costs to UNCP or would negatively impact UNCP's credit rating.

At no point, however, should UNCP intentionally operate outside an established policy ratio without conscious and explicit planning.

4.2 Ratio One – Debt to Obligated Resources

4.2.1 The ratio, which is based on the legal structure proscribed by the General Revenue Bond Statutes, provides a general indication of UNCP's ability to absorb debt on its balance sheet and is the primary ratio used to calculate UNCP's “debt capacity” under the methodology used in the UNC Debt Capacity Study

4.2.2 Policy Ratio: Not to exceed 2.00x (UNC Debt Capacity Study Target Ratio = 1.70x)

4.3 Ratio Two – Five Year Payout Ratio

4.3.1 The ratio measures the percentage of University debt scheduled to be retired in the next five years.

4.3.2 Policy Ratio: Not less than 10% (UNC Debt Capacity Study Target Ratio = 17%)

4.4 Ratio Three – Expendable Resources to Debt

4.4.1 The ratio, which is widely tracked by rating agencies and other capital market participants, is a basic measure of financial health and assesses UNCP's ability to settle its debt obligations using only its available net assets as of a particular date

4.4.2 Policy Ratio: Not less than 0.39x

4.5 Ratio Four – Debt Service to Operating Expenses

4.5.1 The ratio, which is widely tracked by rating agencies and other capital market participants, evaluates UNCP's relative cost of borrowing to its overall expenditures and provides a measure of UNCP's budgetary flexibility

4.5.2 Policy Ratio: Not to exceed 6.70%

4.6 Reporting

4.6.1 The Vice Chancellor for Finance and Administration will review each ratio in connection with the delivery of the University's audited financials and will provide an annual report to the Board detailing (1) the calculation of each ratio for that fiscal year and (2) an explanation for any ratio that falls outside the University's stated policy ratio, along with (a) any applicable recommendations, strategies and an expected timeframe for aligning such ratio with the University's stated policy or (b) the rationale for any recommended changes to any such stated policy ratio going forward (including any revisions necessitated by changes in accounting standards or rating agency methodologies).

5. DEBT PORTFOLIO MANAGEMENT AND TRANSACTION STRUCTURE CONSIDERATIONS

5.1 Generally

5.1.1 Numerous types of financing structures and funding sources are available, each with specific benefits, risks, and costs. Potential funding sources and structures will be reviewed and considered by the Vice Chancellor for Finance and Administration within the context of this Policy and the overall portfolio to ensure that any financial product or structure is consistent with UNCP's stated objectives. As part of effective debt management, UNCP must also consider its investment and cash management strategies, which influence the desired structure of the debt portfolio.

5.2 Method of Sale

5.2.1 UNCP will consider various methods of sale on a transaction-by-transaction basis to determine which method of sale (i.e., competitive, negotiated or private placement) best serves UNCP's strategic plan and financing objectives. In making that determination, UNCP will consider, among other factors: (1) the size and complexity of the issue, (2) the current interest rate environment and other market factors (such as bank and investor appetite) that might affect UNCP's cost of funds, and (3) possible risks associated with each method of sale (e.g., rollover risk associated with a financing that is privately placed with a bank for a committed term that is less than the term of the financing).

5.3 Tax Treatment

5.3.1 When feasible and appropriate for the particular project, the use of tax-exempt debt is generally preferable to taxable debt. Issuing taxable debt may reduce UNCP's overall debt affordability due to higher rates but may be appropriate for projects that do not qualify for tax-exemption, or that may require interim funding. For example, taxable debt may be justified if it sufficiently mitigates UNCP's ongoing administrative and compliance risks. When used, taxable debt should be structured to provide maximum repayment flexibility and rapid principal amortization.

5.4 Structure and Maturity

5.4.1 To the extent practicable, UNCP should structure its debt to provide for level annual payments of debt service, though UNCP may elect alternative structures when the Vice Chancellor for Finance and Administration determines it to be in UNCP's best interest. In addition, when financing projects that are expected to be self-supporting (such as a revenue-producing facility or a facility to be funded entirely through a dedicated fundraising campaign), the debt service may be structured to match future anticipated receipts.

5.4.2 UNCP will use maturity structures that correspond with the life of the facilities financed, not to exceed 30 years. Equipment should be financed for a period not to exceed 120% of its useful life. Such determinations may be made on a blended basis, taking into account all assets financed as part of a single debt offering. As market dynamics change, maturity structures should be reevaluated. Call features should be structured to provide the highest degree of flexibility relative to cost.

5.5 Variable Rate Debt

5.5.1 UNCP recognizes that a degree of exposure to variable interest rates within UNCP's debt portfolio may be desirable in order to (1) take advantage of repayment or restructuring flexibility, (2) benefit from historically lower average interest costs and (3) provide a “match” between debt service requirements and the projected cash flows from UNCP's assets. UNCP's debt portfolio should be managed to ensure that no more than 20% of UNCP's total debt bears interest at an unhedged variable rate.

5.5.2 UNCP's finance staff will monitor overall interest rate exposure and will analyze and quantify potential risks, including interest rate, liquidity and rollover risks. UNCP may manage the liquidity risk of variable rate debt either through its own working capital/investment portfolio, the type of instrument used, or by using third party sources of liquidity. UNCP may manage interest rate risk in its portfolio through specific budget and central bank management strategies or through the use of derivative instruments.

5.6 Public-Private Partnerships (P3)

5.6.1 To address UNCP's anticipated capital needs as efficiently and prudently as possible, UNCP may choose to explore and consider opportunities for alternative and non-traditional transaction structures (collectively, “P3 Arrangements”).

5.6.2 Due to the higher perceived risk and increased complexity of P3 Arrangements, and because the cash flows for the project must satisfy the private partner's expected risk-adjusted rate of return, the financing and initial transaction costs for projects acquired through P3 Arrangements are generally higher than projects financed with proceeds of traditional debt instruments. P3 Arrangements should therefore be pursued only when UNCP has determined that (1) a traditional financing alternative is not feasible, (2) a P3 Arrangement will likely produce construction or overall operating results that are superior, faster or more efficient than a traditional delivery model or (3) a P3 Arrangement serves one of the Board's broader strategic objectives (e.g., a decision that operating a particular auxiliary function is no longer consistent with UNCP's core mission).

5.6.3 Absent a compelling strategic reason to the contrary, P3 Arrangements should not be considered if the Vice Chancellor for Finance and Administration determines, in consultation with UNCP's advisors, that the P3 Arrangement will be viewed as “on-credit” (i.e., treated as University debt) by UNCP's auditors or outside rating agencies. When evaluating whether the P3 Arrangement should be viewed as “on-credit,” rating agencies consider UNCP's economic interest in the project and the level of control it exerts over the project. Further, rating agencies will generally treat a P3 Arrangement as University debt if the project is located on UNCP's campus or if the facility is to be used for an essential University function. For this reason, any P3 Arrangement for a university-related facility to be located on land owned by the State, UNCP or a UNCP affiliate must be approved in advance by the Vice Chancellor for Finance and Administration.

5.7 Refunding Considerations

5.7.1 UNCP will actively monitor its outstanding debt portfolio for refunding or restructuring opportunities. Absent a compelling economic or strategic reason to the contrary, UNCP should evaluate opportunities to issue bonds for the purpose of refunding existing debt obligations of UNCP (“Refunding Bonds”) using the following general guidelines:

5.7.1.1. The life of the Refunding Bonds should not exceed the remaining life of the bonds being refunded.

5.7.1.2. Refunding Bonds issued to achieve debt service savings should have a target savings level measured on a present net value basis of at least 3% of the par amount refunded.

5.7.1.3. Refunding Bonds that do not achieve debt service savings may be issued to restructure debt or provisions of bond documents if such refunding serves a compelling interest.

5.7.1.4. Refunding Bonds may also be issued to relieve UNCP of certain limitations, covenants, payment obligations or reserve requirements that reduce operational flexibility.

6. DERIVATIVE PRODUCTS

6.1 UNCP recognizes that derivative products may provide for more flexible management of the debt portfolio. In certain circumstances, interest rate swaps and other derivatives permit UNCP to adjust its mix of fixed- and variable-rate debt and manage its interest rate exposures. Derivatives may also be an effective way to manage liquidity risks. UNCP will use derivatives only to manage and mitigate risk; UNCP will not use derivatives to create leverage or engage in speculative transactions.

6.2 As with underlying debt, UNCP's finance staff will evaluate any derivative product comprehensively, taking into account its potential costs, benefits and risks, including, without limitation, any tax risk, interest rate risk, liquidity risk, credit risk, basis risk, rollover risk, termination risk, counterparty risk, and amortization risk. Before entering into any derivative product, the Vice Chancellor for Finance and Administration must (1) conclude, based on the advice of a reputable swap advisor, that the terms of any swap transaction are fair and reasonable under current market conditions and (2) ensure that UNCP's finance staff has a clear understanding of the proposed transaction's costs, cash flow impact and reporting treatment.

6.3 UNCP will use derivatives only when the Vice Chancellor for Finance and Administration determines, based on the foregoing analysis, that the instrument provides the most effective method for accomplishing UNCP's strategic objectives without imposing inappropriate risks on UNCP.

7. DEFINITIONS

7.1 Debt to Obligated Resources - UNCP's aggregate outstanding debt as compared to its obligated resources—the funds legally available to service its debt under the General Revenue Bond Statutes. It is calculated by taking Aggregate debt and dividing it by obligated resources1

7.2 Expendable Resources to Debt - The number of times UNCP's liquid and expendable net assets covers its aggregate debt. It is calculated as follows: The sum of (1) Adjusted Unrestricted Net Assets and (2) Restricted Expendable Net Assets divided by aggregate debt

7.3 Debt Service to Operating Expenses - UNCP's debt service burden as a percentage of its total expenses, which is used as the denominator because it is typically more stable than revenues.



1Available Funds - a concept commonly used to capture each UNC campus's obligated resources in its loan and bond documentation, has been used as a proxy for obligated resources. The two concepts are generally identical, though Available Funds may include additional deductions for certain specifically pledged revenues, making it a conservative measure of UNCP's obligated resources.



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