University of Virginia Library

IV. Debt Affordability and Capacity

Purpose

1. Monitor debt affordability and capacity through the use of four key ratios:
• a. Debt Burden Percentage


• b. Debt Service Coverage Ratio


• c. Viability Ratio


• d. Debt Capitalization Percentage


• 2. Clearly communicate with key parties the University’s debt management philosophy and ongoing assessment of debt capacity and affordability.

In assessing its current debt levels, and when planning for additional debt, the University takes into account both its debt affordability and debt capacity. Debt affordability focuses on the University’s ability to service its debt through its operating budget and identified revenue streams and is driven by strength in income and

cash flows. Debt capacity focuses on the University’s financial leverage in terms of debt funding as a percentage of the University’s total capital.

The University considers many factors in assessing its debt affordability and debt capacity including its strategic plan, market position, alternative sources of funding, and relationship with the Commonwealth. The University uses four key ratios to provide a quantitative assessment of debt affordability and debt capacity.

Debt Affordability Measures

Debt Burden Percentage

This ratio measures the University’s debt service burden as a percentage of total university expenses. The target for this ratio is intended to maintain the University’s long-term operating flexibility to finance existing requirements and new initiatives.

ANNUAL DEBT SERVICE
TOTAL OPERATING EXPENSES

The measure is based on aggregate operating expenses as opposed to operating revenues because expenses typically are more stable (e.g., revenues may be subject to one-time operating gifts, investment return fluctuations, variability of Commonwealth funding, etc.) and better reflect the operating base of the University. This ratio is adjusted to reflect any non-amortizing or non-traditional debt structures that could result in significant single year fluctuations including the effect of debt refundings.

Debt Service Coverage Ratio

This ratio measures the University’s ability to cover debt service requirements with revenues available for operations. The target established is intended to ensure that operating revenues are sufficient to meet debt service requirements and that debt service does not consume too large a portion of income.

OPERATING GAIN/(LOSS)
+ NON-OPERATING REVENUE
+ DEPRECIATION >3x
ANNUAL DEBT SERVICE

This ratio is adjusted to reflect any non-amortizing or

non-traditional debt structures that could result in significant single year fluctuations including the effect of debt refundings.

Debt Capacity Measures

Viability Ratio

This ratio indicates one of the most basic determinants of financial health by measuring the availability of liquid and expendable net assets to aggregate debt. The ratio measures the medium- to long-term health of the University’s balance sheet and debt capacity and is a critical consideration of universities with the highest credit quality.

Many factors influence the viability ratio, affecting both the assets (e.g., investment performance, philanthropy) and liabilities (e.g., timing of bond issues), and therefore the ratio is best examined in the context of changing market conditions so that it accurately reflects relative financial strength.

UNRESTRICTED NET ASSETS
+RESTRICTED EXPENDABLE NET ASSETS >2.5x
AGGREGATE DEBT

Debt Capitalization Percentage

This ratio measures what percentage of University capital comes from debt. A university that relies too heavily on debt capital may risk being over-leveraged and potentially reduce its access to capital markets. Conversely, a university that does not strategically utilize debt as a source of capital may not be optimizing its funding mix, thereby sacrificing access to low-cost funding to invest in mission objectives.

AGGREGATE DEBT
TOTAL NET ASSETS + AGGREGATE DEBT < 20%

Use of Ratios in Managing University Credit Ratings

Both the Viability and Debt Capitalization Ratios include any component unit (University-related Foundation) balances as disclosed in the University’s financial statements.

The ratios and limits are not intended to track a specific rating, but rather to help the University maintain a competitive financial profile, funding for facilities needs and reserves, and compliance with Commonwealth debt

service to budget guidelines.

The Debt Policy is shared with external credit analysts and other parties in order to provide them with background on the University’s philosophy on debt and management’s assessment of debt capacity and affordability.