CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier Debt Capacity.

CAUBOWinnipeg, June 17, 2008

Presentation by Lucie Mercier-Gauthier

Debt Capacity

Debt capacity - CAUBO June 20082

Objective and Process

• How do we finance a large number of capital needs?• Currently have over $200 million in debt, including a $150 million

bond• Provided some internal analysis.• Board is debt adverse• Decided to do an RFP to find a consultant to help determine our

debt capacity and to help us develop a capital financing plan for another $150 million capital plan

• Selected an American consulting firm Prager, Sealy & Co.


Methodology

Achieving financial goals through total balance sheet management• Articulate expected long-term and short term investment

returns• Determine amount of liquidity required/desired then invest

unused portion• View total assets & total liabilities as ‘portfolios’• Establish process & timeline for analyzing and implementing

proposed strategies • Determine appropriate financing sources for projects on

University-wide basis• Compare actual and / or opportunity cost of spending

internal vs. using external funds.

•


Analysis

• Analysis of the last 5 years financial statements

• Development of three different sets of assumptions (basic, most probable, worst case) for major revenues and expenses

• 5 year forecast and testing of these scenarios

• Impact of these scenarios on our debt capacity and ratios

• Development of sensitivity analysis (what if scenarios)

• Development of a liability management policy


Major Assumptions

• $150M new 5-year capital plan• Internally finance $75 M and externally borrow $75 M• Invest part of operating cash in a long-term

investment strategy• Assumptions for major revenue and expenses• Maintain future debt capacity


Proposed Ratio Limits

Description ObjectiveProposed

limits2007

(Actual)

2012

(Forecast)

Debt-to-FTE

Measure resources per student allocated to debt. Indicator of resource allocation

< $ 10 000 $ 5 832 $ 7 433

Unrestricted Liquidity-to-Debt

(Balance Sheet)

Measure assets relative to liabilities. Indicator of the overall financial health

> 0.5 x 1.18 x 1.18 x

Interest Coverage

(Statement of Operations)

Measure ability of the University to cover interest expense with operating surplus. Indicator of debt affordability

> 2.5 x 8.91 x 3.80 x


Three Monitoring Ratios (continued)

Why choose these indicators

• Industry standard – key determinants for credit agencies

• Easily calculated – elements found in higher education reports, enabling direct comparison and benchmarking

• Simplification – to assist both Management and Governing bodies in reviewing and making policy decisions

Establishing thresholds

• Established from the median leverage levels in AA category in both Canada and U.S.


If the Ratios Go OffsideProcess and Remedies1. 5 year forecast refreshed on an annual basis, so we can plan for deviation

2. If two out of the three ratios go to:• Debt-to-FTE over $ 9 000 (maximum upper limit $ 10 000)• Unrestricted liquidity-to-debt: under 0.6 (threshold 0.5)• Interest coverage: under 3.00 (threshold 2.50)• Yellow flag Under management review

Policy Management

Debt-to-FTE $ 10 000 $ 9 000Liquidity-to-debt ratio 0.5 x 0.6 xInterest coverage ratio 2.5 x 3.0 x

3. If necessary, action plan to rectify the pending situation (reduction of operational expenses, delay or scale down projects, etc.)


Sensitivity Analysis

Description Forecast Threshold

Ratio Value

(millions of $)

Ratio Value

(millions of $)

Debt-to-FTE $ 7 433 $ 272 $ 10 000 $ 366

Unrestricted Liquidity-to-Debt

(Balance Sheet)

1.18 x $ 320 > 0.5 x $ 136

Interest Coverage

(Statement of Operations)

3.80 x $ 17 > 2.50 X $ 2


Sensitivity Analysis (continued)

• Fluctuation of 0.2 x will be produced by:

– Liquidity-to-Debt: fluctuation of $ 60 M in net assets

– Interest Coverage:

▪ Fluctuation of $ 5 M in revenues or expenses

▪ Fluctuation of $ 1.5 M in interest expenses

• Conclusion: Interest Coverage ratio has a greater risk of fluctuation


Annual Review

• Internally:– Review assumptions for 5-year forecast and refresh analysis– Forecast ratios– Review sensitivity analysis– Review capacity to finance debt from operations– Determine need for debt

• Presented and reviewed annually by the Treasury Committee

• Any decision to borrow externally must be approved by the Board of Governors

• All capital projects are approved by the Board of Governors


Presentation to DBRS and Moody’s

• Presentation to DBRS and Moody’s to present:– The $150 million Five-Year Facilities Renewal and

Expansion Plan– The new proposed Liability Management Policy– The Governance Structure for Capital Plans and Borrowing

• Both DBRS (AA) and Moody’s (Aa2) support our strategy – Support the new liability management policy– Viewed as good discipline– Confirmed our credit ratings

CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier Debt Capacity.

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Transcript of CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier Debt Capacity.