The Strategic Use of Debt to Finance Capital Projects

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The Strategic Use of Debt to Finance Capital
Projects
Terri Gehr, Senior Vice President and Chief
Financial Officer, Columbus State Community
College Kim Tuby, Analyst, Moodys Higher
Education and Not-for-Profit Ratings Team
CCBO Annual Conference, November 2007
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Agenda

• What are funding options for capital projects?
• Capital Markets
• Whos involved in the process and whats their
  role?
• What does Moodys consider in assigning a rating?
• Case study Columbus State Community College
• Process and Costs
• Determining An Institutions Debt Capacity
• QA

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What are funding options for capital projects?

• Cash flow/use of accumulated reserves
• State or county capital appropriations
• Fundraising and private support
• Private partnerships
• Debt/Leases
• Operating or capital leases
• Direct bank borrowing (loans, notes, lines of
  credit)
• Accessing the capital markets and issuing bonds

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Types of Capital Market Borrowing

• Unenhanced (Traditional)
• Based upon the public finance borrowers own
  financial strength and credit quality
• Enhanced
• Insurance Credit strength of the insurer is
  largely substituted for the credit strength of
  the borrower
• Letter of credit Credit strength of the bank
  issuing the LOC is substituted for the credit
  strength of the borrower

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Whos Involved and Whats Their Role?
Rating Agency Report(s) on Borrower
Affects Investors Decision to Bid Interest Rate
on Bond
External Evaluation of Management, Financial
Strength Strategy
Bond Proceeds
Borrower
Investor
Scheduled PI Repayments
Sells bonds to investors Underwriter might
buy bonds for itself
Advises Borrower on best debt structure and
disclosure to capital market
Underwriter and/or Financial Advisor
Issuing Authority, Bond Counsel Trustee play
important legal roles in tax-exempt market
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What Kind of Debt Can We Issue?

• Revenue-Backed Debt
• Payable from a variety of revenue sources,
  including tuition, auxiliary revenue, fees,
  unrestricted gifts, and other legally available
  funds
• General Obligation (G.O.) and Other Tax-Backed
  Debt
• Directly secured by or linked to the colleges
  tax levying capability

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Overview of Moodys Rated Portfolio

• Private Higher Education Nearly 300
  organizations with over 50 billion of
  outstanding debt Median rating of A3
• Public Higher Education Approximately 200
  organizations with over 75 billion of
  outstanding debt Median rating of A1
• Community Colleges
• Approximately 60 organizations with
  revenue-backed debt
• 160 community college districts with 9.5 billion
  of G.O. debt
• Not-for-Profit Organizations Nearly 100
  organizations with 9 billion of outstanding
  debt Median rating of A1
• Preparatory Schools Over 60 organizations with
  1.4 billion of outstanding debt Median rating
  of A2

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Whats Moodys Rating Scale?
Insurers often make decisions here at A3/Baa1
border

• RATING FINANCIAL SECURITY
• Aaa Exceptional
• Aa1,2,3 Excellent
• A1,2,3 Good
• Baa1,2,3 Adequate
• Ba1,2,3 Moderate
• B1,2,3 Weak
• Caa-C Default

Letters of Credit Swaps can contain rating
triggers here
Speculative Grade
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Key Rating Factors for Community Colleges
Tax Base
Capital Needs, Debt and Other Liabilities
Student Demand
Management and Governance
Financial Resources
Operating Performance
Legal Structure Of the Debt
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Case StudyColumbus State Community College

• 1993 Financed land purchase
• 1997 Financed new garage
• 2003 New financing and a refunding
• bookstore/retail complex
• child development center
• various renovation projects
• refinance 1993 debt
• 2007 Refinanced 1997 debt

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How Long Does the Process Take?

• Depends on
• Level of Boards understanding of borrowing
  options
• Length of time the college takes to explore its
  options and make decision
• Approvals that may be necessary locally, e.g.,
  states board of regents, colleges board of
  trustees, internal governance processes
• Complexity of the issuance. Generally, 4-6 weeks
  from the time a financing team is engaged to the
  day the money is in the bank

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What Does It Cost to Issue Debt?

• Legal Counsel
• Underwriter
• Trustee
• Financial Advisor (circumstance-dependent)
• Rating Agency Fee

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Whats Our Capacity for Debt?

• An institutions debt capacity can be defined by
  the amount of debt it is able to support while
• ensuring that it can meet all future debt service
  payments on time and in full while
• continuing to provide its normal full range of
  services and strategic investments
• retaining a degree of financial flexibility to
  absorb any unexpected revenue shortfalls or
  expense increases.

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Some Leverage Measures

• Financial Resources-to-Debt (Unrestricted,
  Expendable and Total Financial Resources)
• Debt Service-to-Operations
• Maximum Annual Debt Service (MADS)-to-Operations
• Debt Service Coverage
• Debt-to-Cash Flow
• Variable Rate Exposure

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Questions/Discussion

• Kim Tuby, Moodys Investors Service
• Kimberly.tuby_at_moodys.com 212-553-7738
• Terri Gehr, Columbus State Community College
• tgehr_at_cscc.edu 614-287-2642