The University recognizes that numerous types of financing structures
and funding sources are available, each with specific benefits, risks,
and costs. All potential funding sources are reviewed by management
within the context of the Debt Policy and the overall portfolio to
ensure that any financial product or structure is consistent with the
University’s objectives. Regardless of the financing structure(s) being
utilized, a due diligence review must be performed for each transaction,
including (i) a quantification of potential risks and benefits, and (ii)
an analysis of the impact on University creditworthiness and debt
affordability and capacity.
Tax-Exempt Debt
The University recognizes that tax-exempt debt is a significant
component of the University’s capitalization due in part to its
substantial cost benefits; therefore, tax-exempt debt is managed as
a portfolio of obligations designed to meet long-term financial
objectives rather than as a series of discrete financings tied to
specific projects. The University manages the debt portfolio to
maximize its utilization of tax-exempt debt relative to taxable debt
whenever possible. In all circumstances, however, individual
projects continue to be identified and tracked to ensure compliance
with all tax and reimbursement regulations.
For tax-exempt debt, the University considers maximizing the external
maturity of any tax-exempt bond issuance, subject to prevailing
market conditions and opportunities and other considerations,
including applicable regulations.
Taxable Debt
In instances where certain of the University’s capital projects do
not qualify for tax-exempt debt, the use of taxable debt may be
considered. The taxable debt market offers certain advantages in
terms of liquidity and marketing efficiency; such advantages will be
considered
when evaluating the costs and benefits of a
taxable debt issuance.
Commercial Paper
Commercial paper provides the University with interim financing for
projects in anticipation of philanthropy or planned issuance of
long-term debt. The use of commercial paper also provides greater
flexibility on the timing and structuring of individual bond
transactions. This flexibility also makes commercial paper
appropriate for financing equipment and short-term operating needs.
The University recognizes that the amount of commercial paper is
limited by the Debt Policy ratios, the University’s variable-rate
debt allocation limit, and the University’s available liquidity
support.
University-issued vs. State-issued debt
In determining the most cost effective means of issuing debt, the
University evaluates the merits of issuing debt directly vs. issuing
debt through the State (e.g., under Article X, Section 9 of the
State Constitution) or a State-issuing entity (e.g., The Virginia
College Building Authority.)
On a regular basis, the University performs a cost-benefit analysis
between these two options and takes into consideration the
comparative funding costs, flexibility in market timing, and bond
ratings of each alternative. The University also takes into
consideration the future administrative flexibility of each issue
such as the ability to call and/or refund issues at a later date, as
well as the administrative flexibility to structure and manage the
debt in a manner that the University believes to be appropriate.
Derivative Products
Management recognizes that derivative products may enable more
opportunistic and flexible management of the debt portfolio.
Derivative products, including interest rate swaps and locks, may be
employed primarily to manage or hedge the University’s interest rate
exposure. The University utilizes a framework to evaluate potential
derivative instruments by considering (i) its current variable-rate
debt allocation, (ii) existing market and interest rate conditions,
(iii) the impact on future financing flexibility, and (iv) the
compensation for assuming risks or the costs for eliminating certain
risks and exposure. Risks include, but are not limited to, tax risk,
interest rate risk, liquidity risk, counterparty credit
risk, basis risk, and any other potential risks either imposed or
removed through the execution of any transaction.
The University analyzes and quantifies the cost/benefit of any
derivative instrument relative to achieving desirable long-term
capital structure objectives. Under no circumstances will a
derivative transaction be utilized that is not understood fully by
management or that imposes inappropriate risk on the University. In
addition, management discloses the impact of any derivative product
on the University’s financial statements per GASB requirements and
includes their effects in calculating the Debt Policy ratios.
Other Financing Sources
Given limited debt capacity and substantial capital needs,
opportunities for alternative and non-traditional transaction
structures may be considered, including off-balance sheet
financings. The University recognizes these types of transactions
often can be more expensive than traditional University debt
structures; therefore, the benefits of any potential transaction
must outweigh any potential costs.
All structures can be considered only when the economic benefit and
the likely impact on the University’s debt capacity and credit have
been determined. Specifically, for any third-party or
developer-based financing, management ensures the full credit impact
of the structure is evaluated and quantified.
