<
WHEN IS IT A GOOD TIME TO ISSUE DEBT?
Jessica Matsumori, S&P Global Ratings
Jeffrey Bethke, DePaul University
Susan Gilbert, University of Pittsburgh
AGENDA
 Introductions
 The
Challenge:
 The
Options:
 The
“Right” Solution:
 Key
Takeaways
Long Term Capital Planning/Needs
In or Out-of-“The Box” Solutions
How Do We Decide What’s Best for Us?
OVERVIEW
How can management teams balance capital planning
and debt needs while maintaining financial
objectives?
Best practices/red flags for capital planning and debt
issuance
 How does S&P view management and governance,
financial management policies, and debt issuance
 Creative strategies and case studies

STANDARD AND POOR’S
OVERVIEW
S&P’S HIGHER EDUCATION RATINGS UNIVERSE
Americas:
• Approximately 560
US public and
private universities
• 8 Canadian
universities
• 3 Mexican
universities
Europe:
• 6 UK public
universities
Australia:
• 3 public universities
 S&P rates almost 600 universities globally
SECTOR SUMMARY: USPF HIGHER EDUCATION
Your dedicated USPF Higher Education Ratings team has over 150 years combined Credit and Sector experience
Analytical Excellence
Manager
Robin Prunty
MD, New York
+212 438 2081
Experience: 28 years
Analytical Manager/
Sector Lead
Senior Analysts
Laura MacDonald
Sr. Director, NY
+212-438-2519
Debra Boyd
Director, Los Angeles
+415-371-5063
Kenneth Rodgers
Director, NY
+212-438-2087
Jessica Matsumori
Sr. Director, SF
+415-371-5083
Charlene Butterfield
Director, NY
+212-438-2741
Jessica Wood
Director, Chicago
+312-233-7004
Experience: 25 years
Experience: 15 years
Experience: 14 years
Experience: 17years
AAA Rated Higher Education Entities in United
States by S&P Ratings Services
PRIVATE
PUBLIC
Columbia University
Grinnell College
Harvard University
Massachusetts Institute of Technology
Northwestern University
Pomona College
Princeton Theological Seminary
Princeton University
Rice University
Stanford University
Swarthmore College
Washington University
Yale University
University of Texas System
University of Virginia
University of Michigan
University of North Carolina at Chapel Hill
Indiana University
Purdue University
Texas A&M University
Source: U.S. Public College And University Fiscal 2014 Median Ratios and
U.S. Not-For-Profit Private Universities' Fiscal 2014 Median Ratios, published July 10, 2015
Experience: 36 years
Experience: 14 years
DEPAUL UNIVERSITY
OVERVIEW
DEPAUL UNIVERSITY
A SNAPSHOT

Founded in 1898






Two Chicago Campuses



Downtown / Loop
 1.9 million sqft in six high-rise buildings
 Commerce, Law, Technology, Communications
Lincoln Park Neighborhood
 45 acres
 1.9 million sqft in 47 buildings (2,400 beds)
 LA&SS, Science & Health, Education, Music, Theatre
At FYE 2016 [unaudited]



Largest Catholic university in the U.S.
Among the 10 largest private universities in the U.S.
10 colleges enrolling 23,000 students
St. Vincent DePaul – respect, compassion, charity
Catholic, Urban, Vincentian
$423 Million endowment + $94 Million reserves and
$64 Million operating funds
$570 operating revenues / 6.9% operating margin
Debt Portfolio


A / A2 / A long-term ratings with Stable Outlooks
$345 Million of bonds and notes outstanding at FYE 2016
UNIVERSITY OF
PITTSBURGH
OVERVIEW
UNIVERSITY OF PITTSBURGH
A SNAPSHOT

State-related Research University Founded in 1787



Five Campus System in Western PA






Tallest educational building in the Western Hemisphere (4th in the world)
Designated landmark in the National Register of Historic Places
Home to 30 Nationality Rooms, also designated as historical landmarks
At FYE 2016 [unaudited]




Main campus – Oakland, Pittsburgh
 132 urban acres
 Over 100 academic, research, administrative buildings and residence halls
Regional campuses - Johnstown, Greensburg, Bradford and Titusville
32,714 FTE students
42-story Cathedral of Learning, on Pitt’s Main Campus


Commonwealth appropriation ~ 7% of operating revenues
Commonwealth appoints one-third of voting board of trustees
$3.5 Billion endowment + $558 Million operating funds portfolio
$726 Million in research grants and contracts
th in NIH funding)
 34% of operating revenues (ranks 5
$2.1 Billion in operating revenue
Debt Portfolio


AA+ / Aa1 long-term ratings with Stable Outlooks
$941 Million of bonds and notes outstanding at FYE 2016 [unaudited]: 77% fixed rate + 23% variable rate
THE CHALLENGE:
LONG TERM CAPITAL
PLANNING/NEEDS
DEALING WITH MAINTENANCE: A SERIOUS CREDIT
CHALLENGE

Deferred Maintenance is a financial challenge for both public and private
Institutions
 Aging Facilities & IT
 Growing student demand for amenities

Significant deferred maintenance can create financial & debt pressure for
institutions

S&P views a low level of deferred maintenance a credit positive
 Defined as institutions with an average age of plant of < 10 years
 Limited deferred maintenance indicates that facilities are more likely
to attract and retain high-quality students
DEPAUL UNIVERSITY
DEFERRED MAINTENANCE & LONG-TERM CAPITAL PLANNING

No Deferred Maintenance Policy

Routine Capital Maintenance Budget



Tax-Exempt Finance for NR CapEx


$11-14 Million / year
Approximately 2% of operating budget
Post Issuance Compliance Challenges
Operating Surplus Set-Asides
/ Internal Financing

Conservative Planning & Budgeting

Responsibility to Future Generations
UNIVERSITY OF PITTSBURGH
LONG-TERM CAPITAL PLANNING PROCESS

Facility Condition Assessment (FCA) ~ Provides Baseline Data




Current 12-Year Facilities Plan (FY 2007-2018)



Three phases of 4 years each
Focus on preservation and renewal
New Facilities Plan (in-process) ~ Institute “Rolling” FCA to Support a 5-year Refresh of Overall Facilities Plan



2006: conducted on a portion of the main campus facilities
2015: conducted on all buildings across all 5 campuses, including owned utilities
 Comprehensive inspection: bottom to top, inside outside, underground
 Facilities Management staff reconciles FCA report with actual renovation and repair activity
Independently, a focused-assessment performed on 5 significant buildings (2015)
 Space utilization, alignment with academic and research priorities, programmatic use, occupants
Benefits:
 Refreshed data reduces future uncertainty
 Agile Facilities Plan can accommodate unplanned opportunities and/or new initiatives
 Capital projects will be compliant with current and changing codes
Anticipated approval by board of trustees ~ spring 2017
Direct linkage to University Strategic Priorities
Stakeholders: Facilities Management, CFO, Provost, Dean-School of Medicine

Must manage and align faculty expectations with strategic goals and financial considerations

Where should the programmatic renovations and upgrades occur?

Separate from Educational/General segment, both Auxiliaries and School of Medicine develop their own
stand-alone funding plan(s), with review and approval by the CFO

Prioritized Deferred Maintenance: Key Benefits

Allows the conversation

Replaces emotion with reason

Strategy drives the deployment of capital

Provides great guidance to fundraisers

Supports risk management
OPTIONS:
IN OR OUT-OF-“THE BOX”
SOLUTIONS
DEPAUL UNIVERSITY
UNIVERSITY CENTER OF CHICAGO

1,729-bed dorm

Three Universities

Stand-alone issuer

Financials

Challenges
DEPAUL UNIVERSITY
MCCORMICK PLACE EVENT CENTER





10,000-seat Arena
Public-Private
Partnership
Complementary
Objectives
Made Possible by
Mutual Interests
Shared Revenues
DEPAUL UNIVERSITY
MCCORMICK PLACE EVENT CENTER
DEPAUL UNIVERSITY
MCCORMICK PLACE EVENT CENTER
ISSUING DEBT








Fixed vs. Variable Rate
Tax-Exempt vs. Taxable
Duration /Amortization
P3s / Indirect Debt
Direct Placement/Bank Debt
Derivative products
Green Bonds
Debt / Liquidity policies
RISK STRUCTURE RELATIVE TO DEBT

Is there a risk management structure in place?

Buy-in by the organization

Defined risk tolerance or risk appetite

Communicated to the Board
THE “RIGHT” SOLUTION:
HOW DO WE DECIDE WHAT’S BEST
FOR US?
A RATING AGENCY PERSPECTIVE:
KEY BENEFITS OF FINANCIAL POLICIES
•
Defines the institution’s philosophies on financial planning and related topics (debt)
•
Supports long-term liquidity, financial, and capital budget planning and forecasts
•
Requires prioritization and strategic planning
•
Provides Board comfort!
•
Portfolio rather than transaction approach
•
Debt Policy - Quantifies risk tolerance levels (capacity and affordability)
•
Rating and cost of capital stability
•
Strategic benchmarking to peers
MANAGEMENT AND GOVERNANCE

Governance is a very important factor in evaluation of credit profile
 Mgt and Gov weighed 10% of the overall Enterprise Profile
assessment, & Financial Mgt Policies weighed 10% of the overall
Financial Profile assessment
 Encompasses the broad range of oversight and direction
conducted by a university's board representatives,
executives, and functional managers

Assessment of the effectiveness of management considers:
 Strategic competence
 Operational effectiveness
 Ability to manage risks
UNIVERSITY OF PITTSBURGH
FINANCING THE CAPITAL PLAN

Focus on Fundraising




Judicious Approach to Incremental Debt




It’s not “How much debt can we issue?”
 CFO’s role: “Can we afford to service the debt?”
Examination of all sources of available funding (reserves, state support, fundraising/gifts, external
debt)
Balancing act: providing financial flexibility at a relative low cost; maintaining strong credit ratings;
acknowledging strategic priorities
Fiscal Discipline: Managing External Debt Service alongside Internal Debt Service



Mastering the donor cultivation cycle; effective stewardship ~ managing long-term relationships
Have sufficient resources been invested here? (time, human capital, financial resources)
Successful philanthropy can serve as a strategic driver, when compared to other critical challenges
(state support, tuition-increase restrictions)
Smoothing the debt service
 University internally sets aside annual debt service, removing volatility to operating budget
Funded Depreciation Reserve strategy ~ funding plan formalized in FY2006
Sensitivity Analysis with Incremental Debt

Financial metrics compared to Rating Agency median ratios
UNIVERSITY OF PITTSBURGH
FUNDED DEPRECIATION RESERVE STRATEGY
Dollars in millions
Cumulative
Funding Balance
FYE 2006
1.0
1.0
FYE 2007
2.0
3.0
FYE 2008
3.0
6.0
FYE 2009
4.0
10.0
FYE 2010
5.0
15.0
FYE 2011
6.0
21.0
FYE 2012
7.0
28.0
FYE 2013
8.0
36.0
FYE 2014
9.0
30.0
FYE 2015
10.0
25.0
FYE 2016
11.0
21.0
FYE 2017
12.0
18.0
FYE 2018
13.0
16.0
FYE 2019
14.0
15.0
FYE 2020
15.0
15.0
FYE 2021
16.0
15.0
40.0
Spending
35.0
30.0
Initial Draw
25.0
20.0
(15.0)
(15.0)
(15.0)
(15.0)
(15.0)
(15.0)
(15.0)
(16.0)
15.0
10.0
5.0
0.0
FYE
2006
FYE
2007
FYE
2008
FYE
2009
FYE
2010
FYE
2011
FYE
2012
Cumulative
FYE
2013
FYE
2014
Spending
FYE
2015
FYE
2016
FYE
2017
Funding
FYE
2018
FYE
2019
FYE
2020
FYE
2021
METRICS & MODELING

Six-year financial projections

Key Ratios



Available Funds to LT Obligations
Available Funds to Expenses
Operating Margin
KEY TAKEAWAYS
SOME KEY TAKEAWAYS






Mgt & gov, policies & practices are important
Communicate, communicate, communicate (with your Board….and
also with your rating agency/ies)
Prioritization is critical
Remain FLEXIBLE
 explore all possibilities & don’t be afraid to be creative
 Don’t box yourself in – leave room to take advantage of future
opportunities
Revenues can change, but debt service (most often) is fixed
Continually refresh plan/assumptions
APPENDIX
A RATING AGENCY PERSPECTIVE: DOS & DON’TS
Assessment Definitions
Elements
Extremely Strong
Strong
Vulnerable
Long-term
planning policies
Multiyear financial and capital
plans exist where future issues are
identified along with possible
solutions. Well-documented and
realistic assumptions support the
plans, and the plans are used for
drawing up budgets to support a
strong commitment to financial
discipline. Targets are included in
the budget and adhered to
consistently.
Multiyear projections are done only
informally that lack detail on
assumptions and implications. Some
assumptions may be
optimistic but are recognized as such.
There is an absence of mediumterm financial planning, reflecting
a short-term approach. The
financial strategy is aggressive
and based on
unrealistic assumptions without
clear financial benchmarks.
A RATING AGENCY PERSPECTIVE: DO’S & DON’TS
Assessment Definitions
Elements
Extremely Strong
Strong
Vulnerable
Transparency and
disclosure policies
Timely and detailed financial reports,
possibly regulated by law, on all
operating segments exist and are
published several times a year. Reports
use accrual-based
accounting concepts and include
both consolidated and segment-level
reporting if applicable. No material
audit findings or qualifications exist.
The effective and integrated use of
counting and reporting software
provides data as needed on short notice
for information and control purposes.
Published reports are produced
once a year. Both accrual and
cash-based elements may exist.
The report is independently
audited, and only minor
qualifications exist. Data for
reporting and control analysis
exists periodically, but requires
significant resources to
generate.
Financial reporting is basic and
incomplete. It may be
communicated with material
delays. Accounting standards
are limited or unclear. An audit
does not exist or has significant
findings.
Investment management
policies
There is a well-defined long-term
investment policy with asset allocation
targets that are appropriate to the
university’s liabilities, investment office
sophistication, and potential capital
needs. Actual accomplishments against
declared investment policies
are followed up consistently.
There is a formal investment
policy; however, the asset
allocation targets are aggressive
or concentrated such that there is
increased risk, or there is an
informal investment policy
There is no investment policy.
If there is one, the policy is
more
aggressive than that of peer
universities, and there is some
significant concentration in the
asset allocation.
A RATING AGENCY PERSPECTIVE: DOS & DON’TS…
Assessment Definitions
Elements
Extremely Strong
Strong
Vulnerable
Reserve and
liquidity policies
A well-defined, formal operating
reserve and liquidity policy exists.
The policy links reserve levels to cash
flow needs. Management has
historically adhered to the policy and
is expected to continue to do so. Cash
and debt management
functions are centralized and
integrated.
A reserve policy exists, but it may be less
formal or the level has less connection to
the university’s unique characteristics.
The
university has historically adhered to the
policy. Cash management is less
centralized and may not be integrated
with debt management.
No reserve or liquidity policies exist,
or if they do, they are not followed.
Cash
management is highly decentralized.
Debt
management
policies
A debt management policy with wellprescribed debt limits exists. The
policy dictates that long-term debt is
used only for capital expenditures.
The policy is detailed, actively
monitored, and risk-averse. If
derivatives are allowed, detailed
policies prudently limit their uses.
A basic policy exists and includes
provisions that long-term debt be used
for
capital expenditures and refinancing of
long-term borrowings. Derivatives are
only used for hedging purposes.
No effective policies exist. The
university
uses long-term debt to cover liquidity
needs and regularly breaches
debt limits. Debt management is
aggressive, or derivatives are used for
speculative purposes.