WHEN IS IT A GOOD TIME TO ISSUE DEBT? < Jessica Matsumori, S&P Global Ratings Jeffrey Bethke, DePaul University Susan Gilbert, University of Pittsburgh
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:
Long Term Capital Planning/Needs
The Options: In or Out-of-“The Box” Solutions
The “Right” Solution: How Do We Decide What’s Best for Us?
Key Takeaways
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 rates almost 600 universities globally
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’S HIGHER EDUCATION RATINGS UNIVERSE
SECTOR SUMMARY: USPF HIGHER EDUCATION
AAA Rated Higher Education Entities in United States by S&P Ratings Services
PRIVATE PUBLIC Columbia University University of Texas System Grinnell College University of Virginia Harvard University University of Michigan Massachusetts Institute of Technology University of North Carolina at Chapel Hill Northwestern University Indiana University Pomona College Purdue University Princeton Theological Seminary Texas A&M University Princeton University Rice University Stanford University Swarthmore College Washington University Yale University
Your dedicated USPF Higher Education Ratings team has over 150 years combined Credit and Sector experience
Analytical Excellence Manager
Analytical Manager/ Sector Lead
Senior Analysts
Robin Prunty MD, New York +212 438 2081 Experience: 28 years
Laura MacDonald Sr. Director, NY +212-438-2519 Experience: 25 years Jessica Matsumori Sr. Director, SF +415-371-5083 Experience: 15 years
Debra Boyd Director, Los Angeles +415-371-5063 Experience: 14 years Charlene Butterfield Director, NY +212-438-2741 Experience: 17years
Kenneth Rodgers Director, NY +212-438-2087 Experience: 36 years Jessica Wood Director, Chicago +312-233-7004 Experience: 14 years
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
DEPAUL UNIVERSITY OVERVIEW
DEPAUL UNIVERSITY A SNAPSHOT Founded in 1898
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
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] $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
Commonwealth appropriation ~ 7% of operating revenues Commonwealth appoints one-third of voting board of trustees
Five Campus System in Western PA 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 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] $3.5 Billion endowment + $558 Million operating funds portfolio $726 Million in research grants and contracts
34% of operating revenues (ranks 5th in NIH funding) $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 $11-14 Million / year Approximately 2% of operating budget
Tax-Exempt Finance for NR CapEx 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
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
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 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
1,729-bed dorm
Three Universities
Stand-alone issuer
Financials
Challenges
DEPAUL UNIVERSITY UNIVERSITY CENTER OF CHICAGO
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
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 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)
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 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
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
FYE2006
FYE2007
FYE2008
FYE2009
FYE2010
FYE2011
FYE2012
FYE2013
FYE2014
FYE2015
FYE2016
FYE2017
FYE2018
FYE2019
FYE2020
FYE2021
Cumulative Spending Funding
Cumulative Funding Balance Spending
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 (15.0) FYE 2015 10.0 25.0 (15.0) FYE 2016 11.0 21.0 (15.0) FYE 2017 12.0 18.0 (15.0) FYE 2018 13.0 16.0 (15.0) FYE 2019 14.0 15.0 (15.0) FYE 2020 15.0 15.0 (15.0) FYE 2021 16.0 15.0 (16.0)
Dollars in millions
Initial Draw
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 medium-term 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 well-prescribed 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.