Policy 114
Approved Board of Governors 2007.7LIABILITY MANAGEMENT
1. PURPOSE
The purpose of this Liability Management Policy (“Policy”) is to outline the University of Ottawa’s (“University”) general philosophy on the use of debt and debt affordability and to establish specific financial measures that will be used to monitor the impact of debt on the financial strength of the University.
- (a) to ensure that the University maintains access to the capital markets;
- (b) to align the strategic use of debt with the University’s investment policies to manage the overall cost of capital, minimize long-term costs for debt service and ensure the overall level of risk does not exceed acceptable levels;
- (c) take into account the University’s assets, liabilities and market conditions when evaluating different debt strategies and instruments, including bridge financing and derivative products; and
- (d) to guide on-going relationships with the rating agencies, bond purchasers and other external constituents by communicating the management approach to financing strategies undertaken by the University.
3.1 University management shall have the authority to manage the assets and liabilities of the University in compliance with policy ratios (or financial measures). These policy ratios shall be used by the University as guidelines to determine the University’s optimal amount of outstanding debt by measuring the impact of outstanding debt on financial position. These policy ratios shall be subject to review by the University on at least an annual basis.
3.2 For the purposes of this Policy, the policy ratios shall be as follows:
- (a) Ratio 1 – Unrestricted Liquidity-to-Debt Ratio: This ratio measures assets relative to liabilities (balance sheet leverage) and is an indicator of overall financial strength. The University has established a threshold of a minimum 0.5 coverage:
- (b) Ratio 2 – Interest Coverage: This ratio measures a key determinant of debt affordability as it quantifies the capacity of surplus operating revenues to pay the University’s current and potential interest burden. The University has established a threshold of surplus operating revenues at 2.5 times interest expense:
Excess of Revenue over Expenses + ≥ 2.5
Interest Expense+ Amortization Of Capital -
Amortization Of Deferred Revenues Related To Capital Assets
Interest Expense
- (c) Ratio 3 – Debt-to-Full Time Equivalent (FTE): This ratio measures the resources allocated to debt on a per student basis and is an indicator used to compare resource allocations to similar institutions. The University has established a threshold of Debt-to-FTE of a maximum $10,000:
Total University Debt < $10,000
Full-time Equivalent
3.3 University management shall ensure that capital projects will continue to utilize a mix of financing sources including internally restricted assets, unrestricted resources, philanthropy, external debt, and general grants as debt will be considered a perpetual component of the University’s capital structure.
3.4 Debt will be managed by University management on a long-term portfolio-basis consistent with the long-term objectives of managing the University’s balance sheet as a whole rather than viewing long-term assets and liabilities separately.
3.5 The specific amounts, types and uses of debt selected by University management shall be designed to help the University achieve the lowest cost of capital consistent with the University’s risk tolerance profile.
3.6 The University has established the thresholds for the policy ratios at levels that are expected to maintain flexibility to fund future projects and to ensure sufficient funds shall be available to meet future operational requirements.
3.7 It is understood that the policy ratios in this Policy are standard industry measures of financial strength used by recognized credit rating agencies to assess credit quality of issuers and the thresholds are based on median levels for AA rated institutions to maintain the University’s competitive financial profile.
3.8 The policy ratios and associated thresholds are University established guidelines; they are not to be considered as legal covenants by the University.
4.1 The University may only use external debt financing to meet the funding requirements of a capital plan that has been approved by the Board of Governors (the “Board”).
4.2 External debt may not be issued or credit facilities established by University management without the prior authorization of the Board.
5.1 University management has the authority to implement specific financial transactions consistent with this Policy and in accordance with stated procedures approved by the Board.
5.2 The Treasury Committee of the Board shall oversee implementation of specific financial transactions and shall monitor the asset and liability structure related to this Policy.
6.1 University management shall report the policy ratios to the Treasury Committee of the Board on at least an annual basis. Such reports shall include actual results based on the University’s audited financial statements as well as prospective calculations based on the five-year forecast to identify deterioration of the financial outlook in advance.
6.2 Notwithstanding section 6.1, if the five-year forecast of the University indicates that unrestricted liquidity–to-debt is expected to fall below 0.6 or interest coverage is expected to fall below 3.00 or debt-to-FTE is expected to increase to $9,000, and two out of three of the limits in this paragraph 6.2 are violated, a management review shall be conducted to develop action plans to rectify the pending situation.
6.3 This Policy will be reviewed on at least an annual basis to ensure it remains consistent with the University’s objectives and the external environment.
6.4 The Treasury Committee of the Board may recommend revisions to this Policy, if deemed desirable.
7.1 No exceptions shall be made to this Policy without the prior written consent of the Board.