Debt Management Policy

Category:

Approval:

Responsibility:

Date:

Board

VPOC, Board of Trustees

Vice-Principal (Finance and Administration) Office

Date initially approved: October 4, 2008

Date of last revision: December 5, 2014

Purpose/Reason for Policy:

As maintaining and increasing its capital assets are fundamental to achieving the University’s mission, it is critical to balance the need for both current and future infrastructure and strategic investments. As a result, the University has used and will continue to utilize a mix of funding sources, including internal resources, philanthropy, external debt and grants to finance capital projects.

This policy will assist in ensuring that debt is used strategically to support the University’s mission and purpose as a higher education institution, increasing transparency by creating alignment between use of proceeds and debt issuance.

Scope of this Policy:

This debt management policy outlines the general philosophy for use of debt by Queen’s University and introduces specific metrics used to assess overall debt capacity and debt affordability. As a guiding principle, Queen’s will manage debt on a long-term portfolio basis, similar to its management of its long-term investment assets. This total balance sheet management approach will be a critical component in helping the University, consistent with its risk tolerance, to maximize asset returns and achieve the lowest cost of borrowing when continuing to invest in the facilities of the University.

As the University evaluates future capital projects and operating budgets, the goals and principles outlined in this debt policy will be reflected in those decisions. This policy applies to all organizational units within the University.

Policy Statement:

1. Objectives

The overall objective is to optimize the strategic use of debt and to achieve the lowest cost of funding for the University as a whole. New debt will only be issued for strategic priorities and to create financial flexibility and intergenerational equity, particularly where there are revenue producing opportunities. The debt management policy helps establish the costs and benefits of debt within established financial parameters. Bridge financing, selected derivative products, long term fixed and variable rate debt will all be considered to achieve the goal of risk management and an attractive cost of borrowing. In determining different debt strategies, Queen’s will take into account its current assets and liabilities along with current market conditions when evaluating different debt strategies and instruments.

A secondary objective of this policy is to help guide the University’s on-going relationship with the rating agencies, bond purchasers and external constituents by providing continuous communication and education. However, the use of debt will not be dictated by external parties; the University’s decisions regarding debt will be internally motivated and it will not manage itself to a specific rating.

2. Establishment of Policy Ratios

This policy establishes guidelines regarding the strategic and transparent use of debt within limits established by University-wide ratios. These ratios measure University balance sheet resources and annual operations, in an attempt to measure both debt capacity and debt affordability. They can be derived from the University’s financial statements and are subject to periodic review.

Viability Ratio: This ratio measures debt capacity. It determines balance sheet leverage by comparing University expendable net assets to outstanding debt obligations.

	UNRESTRICTED NET ASSETS +
	INTERNALLY RESTRICTED NET ASSETS +
VIABILITY RATIO =	INTERNALLY RESTRICTED ENDOWMENTS	≥ 1.25x
	TOTAL UNIVERSITY EXTERNAL DEBT

A 1.25 ratio, or 1.25x (times) coverage, indicates that the University has unrestricted and internally restricted financial resources which are at least 25% greater than the amount of its debt.
For the purposes of the Viability Ratio calculations, internally restricted net assets shall not include those liabilities associated with employee future benefits, as these represent a non-cash liability and do not impact the available cash to repay debt. Furthermore, net assets shall include deferred contributions (unspent research and other targeted revenue) as it represents available cash at a point in time.

Debt Burden Ratio: This ratio is a key determinant of debt affordabilityas it quantifies the maximum percent of operating expenses dedicated to repaying the University’s current debt burden. Note that amortization of capital assets is credited back to revenues since it is not a cash expense.

DEBT	ANNUAL PRINCIPAL AND INTEREST
BURDEN=	TOTAL OPERATING EXPENSES -	≤ 3.25%
RATIO	AMORTIZATION OF CAPITAL ASSETS +
	ANNUAL PRINCIPAL

Queen’s has established a threshold of less than or equal to 3.25% of adjusted operating expenses to ensure significant coverage is available without jeopardizing potential funds available for other internal purposes.

While this ratio limits the percent of the University’s overall operating expenses which are needed to pay debt service for the University as a whole, Queen’s will also need to be mindful of the impact on the operating budget of the University as well as its different units and departments.

Since it is the intent of the University to maintain its debt policy ratios within the ranges specified above, the evaluation of proposed projects will take into account their impact on these ratios over time. Additional ratios, including debt-to-FTE, will be monitored in order to provide management with a more complete understanding of the University credit and financial profile. The University understands that ratios and limits are not intended to track a specific rating, but rather ensure the maintenance of the University's competitive financial profile, funding for internal facilities needs and reserves, and long-term financial equilibrium.

3. Compliance with Debt Covenants

The University will report annually to the Capital Assets and Finance Committee the University’s compliance with all covenants and obligations associated with any outstanding debt, including the punctual payment of debt service.

4. Annual Debt Obligations

During the University’s annual operating budget process, management will incorporate the source of funding for interest and principal payments along with annual costs (trustees, credit rating fees, etc.) and sinking fund balances associated with outstanding debt. The University will fund payments through a combination of internal loans, operating funds (exclusive of operating grants), ancillary funds, capital funds, sinking fund balances, if any, and investment income, as needed.

5. Sinking Funds

If the pricing is reasonable, the University will utilize amortizing debt as it is a more efficient vehicle with the sinking fund “priced in” at loan origination. For any bullet debt, where the full principal is due at maturity, the University will maintain a voluntary sinking fund to provide sufficient funds to repay principal on outstanding bullet debt when due. The sources of cash inflows for the sinking fund may include, but are not limited to, revenues associated with the cash flows generated from capital projects, operating funds, and proceeds from the repayment of internal loans provided to University departments and units.

The sinking fund shall be invested with the objective of maximizing investment returns over the time horizon, subject to the two goals of matching cash flows and preserving capital. As a result, the following investment guidelines shall be utilized for the assets in the sinking fund:

Permitted Investments

Government of Canada treasury bills, notes, debentures, zero-coupon instruments (stripped coupons and residuals) and any debt obligations unconditionally guaranteed by the Government of Canada;
Provincial treasury bills, notes, debentures, zero-coupon instruments (stripped coupons and residuals) and any debt obligations unconditionally guaranteed by a provincial government of Canada;
Municipal government notes, debentures, and any debt obligation unconditionally guaranteed by a municipal government of Canada;
Debt obligations of municipal financing authorities such as the Municipal Finance Authority of British Columbia or the Alberta Capital Finance Authority;
Cash and cash equivalent investments as approved under Queen’s University Short- Term Fund Statement of Investment Policies and Procedures;
Any other investments that the Investment Committee may approve from time to time.

b. Minimum Credit Rating

Any investment must have a minimum credit rating of “A (low)” or equivalent from at least two of the following bond rating agencies: Dominion Bond Rating Service, Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings Inc. (at the time of purchase). These criteria shall not apply to any pooled fund holdings held in the Short-Term Fund.

c. Maturity Ranges

Investments purchased for the sinking fund must mature no earlier than 3 years prior to the maturity date of Queen’s bullet debt, and no more than one month later than the maturity date of Queen’s bullet debt.

d. Concentration

No more than 10% of the market value of the portfolio shall be invested in a single municipal issuer (at the time of purchase).

e. Currency

All investments must be denominated in Canadian dollars.

The University will continue to consider the sinking fund as a subset of its internally restricted net assets and therefore categorize such funds as expendable resources. As such, the sinking fund will continue to be treated similar to other internally restricted reserves. Returns on the sinking fund will be reinvested into the sinking fund balance.

On an annual basis, the University will review and report the sinking fund value and projections to the Capital Assets and Finance Committee.

6. Internal Loans

Capital projects may be financed through internal loans extended to University departments and units, with the source of funding provided by future revenue streams or operating budget allocations. Internal loans are an important element of cost minimization, as external debt markets are not always the most efficient way to meet immediate University priorities. Internal loans are financed through the use of cash reserves that would otherwise be invested in the Pooled Investment Fund (“PIF”), dependent on liquidity needs. The use of investment funds to finance capital projects without the issuance of external debt provides strategic flexibility and efficiency.

New internal loans will require approval of the Capital Assets and Finance Committee.

At least annually, the University will provide a report to the Capital Assets and Finance Committee on all internal loans, including principal amounts outstanding, lending rates, cash flow schedules, and the sources of funding.

7. Capital Projects Approval

All new capital projects are expected to be fully funded, which could include future revenue streams from ancillary operations, pledged donations, etc. If a capital project is a strategic priority, and it is not fully funded, the University will assess the risks and benefits, including prospective net cash-flow after any revenue generating opportunity, in determining the priority for external or internal debt financing.

As part of the capital project approval process, the University will evaluate the ability of its departments and units to repay any funds advanced by debt or University internal sources to fund such projects, as well as the impact on the policy ratios. The major capital projects approval policy requires the completion of a business case that includes a description of project alignment with the University’s mission, academic plan and institutional priorities. The business case requires a review of risk management, including contingencies for construction cost and fundraising. Importantly, the business case for all new major capital projects must include the impact on operating costs to assure that the on-going impact on University finances can be appropriately assessed and coordinated with the annual operating budget process.

The capital project business case reviews the capital project costs as well as revenue and expense projections to determine capacity to fund any internal or external debt financing. The business cases for all major capital projects are reviewed by the Capital Assets and Finance Committee of the Board of Trustees prior to project approval. The review will include an assessment of whether the commitment enables the University to remain within the constraints of the current and projected debt ratios of the University.

8. Review and Oversight

This debt management policy will be reviewed annually to reflect the University’s objectives and the external environment. The Capital Assets and Finance Committee will regularly review and have on-going oversight of the asset and liability structure related to this policy. The structure of any individual transaction will be based upon overall University needs to ensure that long-term costs are minimized consistent with other strategic objectives. Management will have the flexibility to implement specific financings in accordance with stated procedures for projects approved by the Board. Debt transactions requiring Board authorization will be presented to the Board for approval.

At a minimum, management will report the policy ratios to the Capital Assets and Finance Committee on an annual basis.

Definitions:

“Amortizing Debt” refers to debt in which both principal and interest payments are paid in regular installments to the lender.

“Bridge Financing” refers to the short-term or interim financing of a project until such time that permanent financing is obtained.

“Bullet Debt” refers to debt in which the entire principal amount is due at the maturity date.

“C�ǳܱ�ǲԲ�” refers to the coupon payment portions of a stripped bond.

��-�ٴ�-��շ�”means the ratio of external debt outstanding to the number of full-time equivalent students.

“Internal Loans” refers to those loans that arise when the University uses reserve funds for specific capital projects instead of acquiring funding through an external third party.

“Queen’s University Short-Term Fund Statement of Investment Policies and Procedures” refers to the policy and procedures regarding the investment of the University’s short-term operating funds as approved by the Investment Committee of the Board of Trustees.

“Pooled Investment Fund” or “PIF” refers to the investment fund of the University which primarily contains reserve funds and unspent balances not required for short-term working capital obligations.

��ܲ��” refers to the principal portion of a stripped bond.

“Sinking Fund” means a pool of funds that are set aside by the University for the purpose of accumulating sufficient funds for the payment of all or a portion the principal due on bullet debt at maturity.

“Strip bond”means a bond where both the principal and regular coupon payments – which have been removed, are sold separately. Strip bonds are also referred to as a “zero-coupon bond”, and trade at a discount to their stated par value.

Responsibilities

Contact Officer	Associate Vice-Principal (Finance)
Date for Next Review	One year from date of Approval
Related Policies, Procedures and Guidelines	Internal Loans Policy (April 28, 2014) Major Capital Projects Approval Policy (May 2014)
Policies Superseded by this policy	Liability Management Policy (October 4, 2008) ��˴�Ƭ Sinking Fund Statement of Policy and Procedures (December 2006)

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