Debt Capacity

In general, the University’s debt capacity will be evaluated and determined by the consideration of the following three primary factors:

  1. Legal authorizations and limitations
  2. Current and pro forma financial operating performance
  3. Credit considerations including the University’s credit rating

The University’s legal debt capacity as specified in applicable debt covenants and statutory restrictions is the starting point for evaluating the appropriate level of new and total indebtedness.

The University covenants in the Letter of Credit and Line of Credit that it established for the 2008 bond issue that the following financial ratios be maintained:

  • Liquidity Ratio of at least 1.00. That is, the sum of cash, short term investments, and funds designated for long term investment, less balance of temporarily and permanently restricted net assets cannot be lower than the total operating expenses.
  • Debt Service Coverage Ratio of at least 1.25. That is, the sum of (i) change in unrestricted net assets from operations excluding any extraordinary, unrealized portfolio gains/losses, plus (ii) interest expenses, plus (iii) depreciation and amortization must be at least 1.25 times higher than the sum of (i) scheduled principal payments on long term debt, plus (ii) interest expense.

The University’s debt capacity is in part a function of current and pro forma operations, which, as reflected in financial ratios, is also one of the numerous factors that are reviewed in determining the University’s credit rating. The portion of the operating budget dedicated to debt service (principal repayment and interest) will vary over time as the University makes judgments about its highest priorities and needed investments. While a maximum percentage will be established, annual debt service (principal repayment and interest) as a percentage of the operating budget may vary over time as the University makes judgments about its highest priorities and needed investments.

Credit considerations encompass an array of factors that affect how the University is viewed by the financial and capital markets. Many of these factors are analyzed by the credit rating agencies in the determination of the University’s credit rating. As such, the University’s credit rating is an important reflection of the University’s operating, management, and financial strengths, and a significant determinant of both its access to and cost of capital. The University’s policy framework with respect to managing its credit rating is detailed in a following section.

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