 | Board of Visitors minutes April 7, 2006 |  |
VI. Portfolio Management of Debt
Purpose
- 1. Permit decisions regarding debt issuance and structure to be made on a portfolio basis, rather than on a per-project basis.
- a. Limit variable-rate exposure.
- b. Manage the overall liquidity requirements associated with outstanding debt.
- c. Target overall variable-rate debt exposure.
- 3. Evaluate exposure to other financing vehicles and third parties on a portfolio-wide basis.
2. Manage variable-rate exposure of the debt portfolio.
The University considers its debt portfolio holistically; that is, it optimizes the portfolio of debt for the entire University rather than on a project-by-project basis while taking into account the University’s cash and investment portfolio. Therefore, management makes decisions regarding project prioritization, debt portfolio optimization, and financing structures within the context of the overall needs and circumstances of the University.
Variable-Rate Debt
The University recognizes that a degree of exposure to variable interest rates within the University’s debt portfolio is desirable in order to:
- (i) Take advantage of repayment/restructuring flexibility;
- (ii) Benefit from historically lower average interest costs;
- (iii) Provide a “match” between debt service requirements and the projected cash flows from the University’s assets; and,
- (iv) Diversify its pool of potential investors.
Management monitors overall interest rate exposure, analyzes and quantifies potential risks, including interest rate, liquidity, and rollover risks, and coordinates appropriate fixed/variable allocation strategies. The portfolio allocation to variable-rate debt may be managed or adjusted through (i) the issuance or redemption of debt in the conventional debt market (e.g., new issues and refundings) and (ii) the use of interest rate derivative products including swaps.
The amount of variable-rate debt outstanding (adjusted for any derivatives) shall not exceed 40 percent of the University’s outstanding debt. This limit is based on the University’s desire to (i) limit annual variances in its interest payments, (ii) provide sufficient structuring flexibility to management, (iii) keep the University’s variable-rate allocation within acceptable external parameters, and (iv) utilize variable-rate debt (including derivatives) to optimize debt portfolio allocation and minimize costs.
VARIABLE-RATE DEBT (INCLUDING
SYNTHETIC)
TOTAL DEBT OUTSTANDING < 40%
Refinancing Outstanding Debt
The University monitors its debt portfolio on a continual basis to assure portfolio management objectives are being met and to identify opportunities to lower its cost of funding, primarily through refinancing outstanding debt.
The University monitors the prices and yields of its outstanding debt and attempts to identify potential refunding candidates by examining refunding rates and calculating the net present value of any refunding savings after taking into account all transaction costs. The University may choose to pursue refundings for economic
Liquidity Requirements
The University’s portfolio of variable-rate debt and commercial paper require liquidity support in the event of the bonds or paper being put back to the University by investors. Generally, the University can purchase liquidity support externally from a bank in the form of a standby bond purchase agreement or line of credit. In addition, the University can also use its own capital in lieu of or to supplement external facilities. Alternatively, it can utilize variable-rate structures that do not require liquidity support (e.g., auction-rate products).
Just as the University manages its debt on a portfolio basis, it also manages its liquidity needs by considering its entire asset and debt portfolio, rather than solely on an issue-specific basis. This approach permits institution-wide evaluation of desired liquidity requirements and exposure, minimizes administrative burden, and reduces total liquidity costs.
A balanced approach is used to provide liquidity support to enhance credit for variable-rate debt through a combination of external bank liquidity, self-liquidity, auction market, or derivative structures. Using a variety of approaches limits dependence on an individual type or source of credit; it also allows for exposure to different types of investors. The University must balance liquidity requirements with its investment objectives and its cost and renewal risk of third-party liquidity providers.
Further, a portfolio-approach to liquidity can enhance investment flexibility, reduce administrative requirements, lower total interest costs, and reduce the need for external bank liquidity.
Overall Exposure
The University recognizes that it may be exposed to interest rate, third-party credit, and other potential risks in areas other than direct University debt (e.g., off-balance sheet transactions, counterparty exposure in the investment portfolio, etc.) and, therefore, exposures are considered on a comprehensive University-wide basis.
| (Underlying Fixed Rate Bonds) | (Underlying Variable Rate Bonds) | |
| LOW Interest rate risk HIGH |
Traditional Fixed Rate Bonds NO TAX RISK |
Synthetic fixed (Floating rate bonds swapped to fixed) |
| Synthetic floating (Fixed rate bonds swapped to floating) |
Variable Rate Demand Obligations TAX RISK |
|
| No UVa Liquidity Requirement Yes | ||
| Board of Visitors minutes April 7, 2006 | |