Administrative Policies
University Policy Number 2111
Subject: Debt Policy
Responsible Parties: Office of the Senior Vice President and Office of Capital Finance
Procedures: N/A
Related Policies: Asset Capitalization Policy
http://www.gmu.edu/facstaff/policy/newpolicy/2109adm.html
I. SCOPE
This policy applies to all George Mason University debt financing activities.
II. POLICY STATEMENT
The University utilizes a long-term strategic plan to establish institutional
priorities and objectives. Within this strategic plan is a capital funding
plan, which sets out the projects to be undertaken and the method of funding
for each project. The University incorporates debt as part of its capital
plan to help it achieve its goals. The proper use of debt is critical in
meeting the goals of the strategic and capital plans.
This policy establishes a control framework to ensure that appropriate discipline
is in place regarding capital allocation, debt portfolio composition, debt
servicing and debt authorization. It establishes guidelines to ensure that
existing and future debt issues are consistent with financial resources
to maintain the proper leverage, a strong financial profile and credit rating.
It is the intention of the University to use debt in a manner consistent
with an investment grade borrower with a minimum credit rating in the “A”
rating category from one or more of the nationally recognized Credit Rating
Agencies.
III. DEFINITIONS
Annual Debt Service: Represents the payment of principal and interest on bonds, notes payable, installment purchases, and capital leases recorded on the University’s financial statements.
Auction Rate Securities: Long-term variable-rate bonds tied to short-term interest rates. Interest rates are reset through a modified Dutch auction process held every 7, 28, or 35 days. The securities are sold at the highest price at which sufficient bids are received to sell all the securities offered.
Commercial Paper: Commercial paper is a generally unsecured debt with a maturity that ranges from 2 to 270 days.
Call Features: The terms of the bond contract giving the issuer
the right, or requiring the issuer to redeem or “call” all or
a portion of an outstanding issue of bonds prior to their stated dates of
maturity at a specified price, usually at or above par and stated as a percentage
of the principal amount called.
Fixed Rate Debt: Debt with interest payment requirements that are
a known amount over the entire term of the debt.
General Revenue Pledge: Bonds or other obligations secured by
the general operating revenues of a Virginia state-supported institution
of higher education. General operating revenues means, without limitation,
the Institution’s total gross university sponsored overhead, unrestricted
endowment income, tuition and fees, indirect cost recoveries, auxiliary
enterprise revenues, general and nongeneral fund appropriations and other
revenues not required by law or restricted by a gift instrument to be used
for another purpose.
Liquidity Facility: A contract with a commercial bank or other
financial institution to temporarily act as owner of variable rate bonds
in the event that bondholders tender the bonds back to the issuer and/or
the bonds cannot be successfully resold on a tender or remarketing date.
Net Present Value Savings Percentage: The aggregate Present Value Savings divided by the principal amount of the Refunded Bonds.
Net Variable Rate Debt: Total variable rate debt less the nominal outstanding amount of synthetic financial products (swaps, caps, etc.) entered into by the University.
Present Value: The value at the current time of a cash payment
or stream of payments which is expected to be received in the future, allowing
for the fact that an amount received today could be invested to earn interest
until the future date(s).
Present Value Savings: A method of calculating the aggregate amount
of savings on a refinancing transaction. In each semi-annual period, the
present value of the debt service on the Refunding Bonds is subtracted from
the present value of the debt service on the refunded Bonds using the arbitrage
yield on the refunding bonds as the discount rate. The present value savings
in each year are added together to result in the aggregate Present Value
Savings.
Rate Stabilization Reserve Fund: A reserve created, primarily for variable rate bonds, to provide additional funds for unexpected increases in interest rate payments.
Rating Agency: One of the three (Fitch Investors Service, Moody’s Investors Service or Standard & Poor’s Corporation) nationally-recognized credit rating agencies.
Refinancing: A procedure whereby an issuer issues new bonds to replace outstanding bonds. The newly issued bonds are called the “refunding bonds,” while the bonds being refinanced are called the “refunded bonds.”
Swap Counterparty: The financial institution with which the University enters into an interest rate exchange transaction.
Synthetic Financial Products: Financial products (i.e., interest rate swaps, caps, collars, etc.) that are primarily used to manage interest rate risk or asset/liability balance.
Termination Events: Any occurrence outlined in the International Swap Dealers Association (ISDA) swap agreement that would cause the termination of the swap agreement.
Terms and Structure: Terms and Structure shall have the same meaning as provided by the Treasury Board Debt Structuring and Issuance Guidelines, as amended.
Variable Rate Debt: Debt with interest payment requirements which change based on market conditions during the term of the debt.
IV. RESPONSIBILITIES
The Office of the Senior Vice President has overall responsibility for implementing this policy and any debt financing activities of the University. The Office of Senior Vice President, with approval from the Board of Visitors, is also authorized to execute any synthetic financial product contract or agreement. Prior to entering into any such agreement, the University will obtain an opinion from bond counsel certifying that such product, contract or agreement is in compliance with federal and state laws.
The University’s Board of Visitors (BOV) must approve this policy, and any subsequent, material changes made to it. The BOV is also required to approve each debt issuance for previously authorized capital projects.
The Office of Capital Finance will be responsible for monitoring compliance with this Policy.
V. DEBT STRUCTURE
Debt service should be structured to meet the financial and strategic management
goals of the University in a manner that allows the coordination of debt
and minimizes the effect of arbitrage on the debt. The University will seek
the lowest cost source of financing without exposing the University to unnecessary
interest rate risks.
Amortization & Term – Bond amortization should reflect
the useful life of the assets being financed with generally not more than
a 30 year term. Maturity structures should be reevaluated as market conditions
change.
Call Features – Call features should provide maximum flexibility relative to the cost of the features. Bonds without a call feature should be limited in the University’s debt portfolio and should be issued only when investors are willing to pay a substantial premium.
Capitalized Interest – The University may choose to use a portion of the proceeds of a bond issue to fund interest on that bond issue for a specified time during the construction period.
Fixed Rate Debt – The University generally will issue fixed rate bonds with long term final maturities for new capital projects.
Variable Rate Debt – The University may use different forms of variable rate debt including variable rate demand bonds, auction rate securities and commercial paper in order to:
a. Achieve effective asset/liability management by matching debt to the useful life of the financed asset or to the investment portfolio.
b. Achieve interest rate savings.
c. Provide flexibility in principal repayment.
d. Diversify investor base.
e. Utilize a portfolio approach to debt to diversify exposure.
In considering the use of variable rate debt the University will:
a. Evaluate the risks involved including liquidity risk and short and long-term interest rate risk.b. Evaluate the use of unrestricted endowment assets, synthetic financial products and rate stabilization reserve funds to help manage interest rate risk exposure.
c. Determine the assumed variable rate for budget purposes, and develop plans to address positive and negative variances from the assumed rate.
d. Limit net variable rate debt to not more than 30% of its total debt.
Credit Enhancement and/or Liquidity Support – The University may utilize credit enhancement in the form of bond insurance or a commercial bank letter of credit or liquidity facility to boost the credit rating of a fixed or variable rate issue and/or offset liquidity risk of a variable rate bond issue. Credit enhancements will be used only when necessary for cost effectiveness and/or marketability and will have a minimum long term credit rating in the “A” rating category.
Tax-exempt and Taxable – Tax-exempt debt will be the preferred method of financing projects. However, in instances where the capital projects do not qualify for tax-exempt financing, the University will consider taxable alternatives.
University-issued vs. Commonwealth-issued Debt – In determining the most cost effective means of issuing debt, the University will evaluate the merits of issuing debt directly as compared to Commonwealth issuance, either directly by the Commonwealth or through one of its issuing entities (such as the Virginia College Building Authority).
Alternative Financing Sources – There are alternative financing sources that may be considered, such as off-balance sheet (non-University) financings. These financings may be more costly than traditional structures and will be used only when the economic benefit, timeliness and likely impact on the University’s debt capacity and credit quality are understood and have been fully evaluated.
Refinancings – The University will consider refinancing existing debt when net present value savings percentage is equal to or greater than 3%. Refinancings that do not produce the minimum 3% net present value savings will be considered when there are substantial benefits to the University, including eliminating restrictive bond covenants.
VI. DEBT CAPACITY RATIO
The University will utilize the following ratio as a guideline for issuing
new debt:
Debt to Expense Ratio no greater than 10%
(Annual debt service/Total operating expenses)
This ratio is adjusted to reflect any non-amortizing or non-traditional
debt structures, or any non-recurring expenditure items, that could result
in significant single year fluctuations.
This ratio may, with BOV approval, exceed 10% in instances involving debt of revenue producing projects when the total debt used to finance the project is fully secured (110%) by the net income derived directly from the specific project or the system of said project.
VII. STATEMENT OF EFFECT ON STUDENT COSTS
The University will determine if the proposed debt will result in additional
cost to University students. A Statement of Effect on Student Costs will
be included in the material presented to the University BOV during the debt
approval process, and in the University’s annual report to the BOV.
VIII. CAPITAL FUNDING SOURCES
Capital Maintenance Funding – The University will determine how to fund the ongoing capital maintenance cost for each capital financed project prior to issuing the debt. If it is anticipated that additional borrowing will be required to fund the capital maintenance for a project then the amount of additional borrowing will be taken into account in its debt capacity analysis.
Debt Service Funding – Prior to the issuance of any amount of debt, the University will identify and analyze the funding source(s) for the debt repayment. Sources may include but are not limited to:
a. State appropriations
b. The general revenue pledge of the University
c. Revenues from the specific project being financed
d. Indirect cost recoveries from sponsored programs
e. Gifts and bequests
f. University affiliated foundations
g. Unaffiliated third parties including joint ventures with private sector entities and grants from private foundations
IX. SYNTHETIC FINANCIAL PRODUCTS
The University will consider the use of interest rate swaps and other synthetic financial products primarily to manage the University’s variable rate debt exposure. They will not be used unless the contract or structure is understood and has been fully evaluated, can be monitored and managed, and the risk imposed has been evaluated and concluded to be appropriate for the University. They shall not be used for speculative purposes.
Procurement and Execution – The University has authority to enter into synthetic financial product transactions either through a competitive bid or a negotiated process. The University must take reasonable steps, such as hiring a qualified advisor, to ensure that the economics involved in a negotiated transaction represent a fair market price while taking into consideration the terms of the agreement and the University’s current financial status.
Swap Counterparties – The University will execute synthetic financial product transactions with counterparties with credit ratings in the “A” category or above as of the transaction date. The University may seek credit enhancement in the form of collateral, guarantees, and/or termination event triggers should the counterparty’s credit rating be downgraded below the “A” category. The University’s ability to procure counterparty credit enhancement and termination event triggers will be subject to then current market standards and the University’s then current financial status. The University will seek to maintain voluntary termination rights in all of its swap or synthetic financial product transactions.
Swap Documentation – The University will utilize standard International Swap Dealers Association swap documentation, including the Schedule to Master Agreement and Credit Support Annex (if applicable).
Rating Agencies – The University will seek a Rating Agency
review to determine the effect of any synthetic financial product transaction
on the credit quality of the University.
X. DISCLOSURE AND REPORTING REQUIREMENTS
Disclosure Requirements – The University will provide updated financial
information and operation data, and a timely notice of specified material
events to each nationally recognized municipal securities information repository
and any State information depository, pursuant to its continuing disclosure
undertakings with respect to SEC Rule 15c2-12 (17 CFR 240.15c2-12).
Reporting Requirements – The University will prepare a report for
the BOV on an annual basis which provides an update of the University’s
current debt structure and status and outlines the proposed future financing
plans.
XI. EFFECTIVE DATE AND APPROVAL
The policies herein are effective March 21, 2007. This Administrative Policy shall be reviewed and revised, if necessary, annually to become effective at the beginning of the University's fiscal year, unless otherwise noted.
Approved:
_______________________
Maurice W. Scherrens
Senior Vice President
________________________
Peter N. Stearns
Provost
Date approved: July 23, 2007