- Term of Debt
The University will determine the appropriate duration and the specific amortization schedule of each bond issue by evaluating its overall debt portfolio. Considerations will include the life of the assets being financed, interest rate costs, risk assessment, general market conditions, and the University’s future financial plans. If and when bullet or balloon payments are used, the University will budget appropriately over the life of the bond issue so that the bullet or balloon maturity payments do not unduly impact any one fiscal year.
- Refinancing and Restructuring of Debt
The administration will periodically review all outstanding debt to determine if refinancing opportunities exist. Refinancing or restructuring of current debt (within federal tax law constraints) may be used to save the University money or to change covenants to provide an advantage to the University’s financial or operating position.
In general, the University will consider refinancing when a current or advanced refunding of debt provides a net present value savings of at least three percent. Refinancing or restructuring opportunities that provide savings of less than three percent, or with negative savings, may be considered if there is a compelling objective such as: a.) realizing lower savings is appropriate given the results of call option analysis on a maturity-by-maturity basis, or analysis of current vs. historic interest rate levels, or b.) restructuring financial or legal covenants that prove disadvantageous to the University.
Where analyzing or pursuing the implementation of refinancing transactions using fixed rate swaps or other derivative products, the University should generate 2 percent greater projected savings than the savings guidelines the University would consider for traditional bonds. This threshold will serve as a guideline and will not apply should the transaction, in the University’s sole judgment, help to meet any of the other objectives outlined herein. The higher savings target reflects the greater complexity and higher risk of derivative financial instruments. Such comparative savings analyses will include, where applicable, the consideration of the probability (based on historical interest rate indices, where applicable, or other accepted analytic techniques) of the realization of savings for both the derivative and traditional structures. Such analysis should also consider structural differences in comparing traditional vs. derivative alternatives, e.g., the non-callable nature of derivative transactions.
- Use of Tax-exempt vs. Taxable Debt
In general, the University will look to avoid the use of taxable debt where other alternatives are available, including equity financing. However, the University may have to utilize taxable debt in certain situations where Federal tax law limits the use of tax-exempt debt for particular projects, especially those where use of the project includes both private and non-profit purposes. The University may also consider taxable debt under other circumstances where market conditions and debt flexibility make it an appropriate alternative. When utilized, the University will consider structuring taxable debt to shorten its term and allow it to be redeemed at the earliest possible date.
- Use of Call Options
The University will consider the use of call options to reduce the University’s overall cost of capital and to provide maximum flexibility in its debt portfolio. The use of non-callable debt beyond 10 years requires the approval of the Finance Committee of the Board of Trustees in that under certain circumstances the sale, disposition, or sharing of an asset financed with tax-exempt debt may require the repayment of such debt first. Moreover, in some interest-rate environments and because of potential future tax changes, long-term non-callable debt may be disadvantageous to the University.