Building With Debt

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Building with Debt

Financing Capital Projects Training

March 3, 2004

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Previous Lending Structure

Debt administered on a project and issue

basis.

Each division bears cost of borrowing atmarket rates at time of borrowing(winners and losers).

Capital funding strategies vary acrossdivisions.

Capital planning is project based, andfuture borrowing costs are unpredictable.

 The University historically had issued debt and passed through the cost to the individualschools and divisions. As such, transactions were dictated by current market conditionsand individual division budgets:

AthleticAthletic

ss

AthleticAthletic

ssParkingParking

ParkingParking A&SA&S

A&SA&S Med. Ctr.Med. Ctr.

Med. Ctr.Med. Ctr.

Variable

4.50%-5.60%

InvestorsInvestors

Variable

Central AdministrationCentral Administration

Central AdministrationCentral Administration

4.50%-5.60%

4.10%-5.90%

4.10%-5.90%

4.00%-5.50%

4.00%-5.50%

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Current Lending Structure andFunding Sources

Starting in 2003, the University now has a pool of funds that the Finance staff willmanage to ensure that there are funds available when needed based on the drawschedules for all projects.

Pooled Funds Managed by Finance

Athletics Parking A & S Med Center 

Taxable

Short Term

 Borrowing

Tax-Exempt

Short Term

 Borrowing

Long Term

 BorrowingInternal Funds

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University Debt Management

Before March 2003 issuance

1. Long term bonds ($337M)

99% fixed rate 1% variable rate

Maturity of 20 years

2. Bridge financing

Project deficits

Internal loans

3. Individual projects associated withspecific issuances

After March 2003 issuance

(40% variable rate, 60% fixed rate)

1. Long term bonds ($438M)

82% fixed rate

18% variable rate

Mixed maturity

Potential for swaps

2. Bridge financing

Short-term borrowing

Internal loans

3. Issuances are pooled; projects borrowfrom the pool

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Benefits of Blended Rate Lending

Structure

Stabilize cost of capital.

Greater internal loan flexibility (i.e.prepayment).

Improve predictability of capital costs forbudget and planning purposes.

Provide consistency of borrowing ratesacross schools and divisions.

De-link external and internal debt structuresto optimize lending rates and takeadvantage of optimal market structures.

Equitable distribution of refinancing savings.

AthleticsAthletics

AthleticsAthletics ParkingParking

ParkingParking A&SA&S

A&SA&S Med. Ctr.Med. Ctr.

Med. Ctr.Med. Ctr.

4.75% 4.75% 4.75%

InvestorsInvestors

Variable

4.75%

Bond PoolBond Pool

Bond PoolBond Pool

Fixed

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Repaying Borrowed Funds

• Internal Payments from Borrowing Units –  Units begin payment the first month that financing is

used in their project’s business plan

 –  Level monthly payments will consist of principal andinterest based on a 20 yr amortization of total financingcosts

 –  Interest will be at an blended borrowing rate (currently

4.75%) –  Investment & Tax Services will make a GL entry each

month from the Oracle project identified as source of repayment

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University Debt ManagementBlended Rate

I. Components of blended rate

1. Fixed rate interest costs

2. Variable rate interest costs

3. Reserve for interest rate volatility

4. Swap costs

5. Internal loan cost of capital

6. Administration of bond pool and monitoring of 

markets (0.1%)

II. Annual review of blended rate for potential resetting

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Questions