Overview of Current Debt Portfolio'

1
Overview of University Debt Management
Practices Finance Division Training
Program April 25, 2006

• Overview of Current Debt Portfolio.
• FYE 2005 Portfolio Allocation (Fixed vs.
  Variable).
• Credit Considerations.
• Key Ratio Methodology.
• Short-term Ratings.
• Long-term Ratings.
• 7. Central Bank Concept.

2
Overview of Current Debt Portfolio

Since fiscal year-end 2003, the University has
increased its total debt from 391 million to a
891 million as of March 2006

3
Current Allocation

The University debt portfolio allocation is
weighted towards fixed-rate debt (total fixed
rate allocation1 was 91 as of March 2006) and
taxable debt accounts for 3 of the total debt
portfolio1.
1 Commercial paper, used primarily for bridge
financing, is excluded from allocation
computation.
4
Credit Considerations

• Many components factor into the credit of the
  University
• State Support/Relationship History and ongoing
  support for both operations and capital from
  state sources.
• Management Breadth and depth of management,
  including establishment of internal policies and
  practices.
• Undergraduate Student Demand and Tuition -
  Market position and demand outlook (both regional
  and national demographics).
• Graduate Programs, Research, and Technology
  Transfer
• Financial Condition Operating and endowment
  performance, leverage levels, and diversity of
  revenues.
• Capital Needs - Ongoing investment in physical
  facilities.

5
Key Ratio Methodology

• The implementation of new GASB 34 and 35
  reporting standards in fiscal year 2002 required
  that UNC re-evaluate the ratios in its debt
  policy, established in fiscal year 2001. The
  methodology of calculating the ratios and the
  resulting limits and targets have been adjusted
  to better reflect the new reporting format.
• The current Debt Policy adopted by the University
  utilizes two key ratios, which were selected to
  reflect the Universitys
• Balance sheet position (Expendable Resources to
  Debt),
• Debt burden (Debt Service to Operations), and
• Cash Flow (Project by Project) The University
  reviews each project to ensure that the cash flow
  from the project will support its pro-rata
  portion of the debt service.
• The Universitys peer group for debt comparisons
  consists of the following institutions

6
Short-Term Ratings

The table below highlights the short-term and
VRDB ratings for UNC and the State of North
Carolina. The table below is a summary
of the short-term (commercial paper ) rating
systems and symbols used by each agency.

• VRDB rating is a combination, in order, of
  long-term debt rating and short-term debt rating.
  (Moodys has a special rating for short-term, or
  demand, portion of VRDBs see second table
  below.)
• Long-term rating for VRDB measures ability to
  meet scheduled principal and interest over the
  term of the bond.
• Short-term rating for VRDB measures issuer's
  ability to meet demand feature of bond.
• State of North Carolina has no rated short-term
  debt.

7
Long-Term Ratings
There are currently three main credit rating
agencies widely recognized in the higher
education municipal market Moodys, Standard
Poors, and Fitch. The first table below
highlights the long-term ratings for UNC and the
State of North Carolina. The table below is a
summary of the different bond rating systems and
symbols used by each.
8
Central Bank Concept

• In 2000, General Assembly authorized the
  University to issue debt with a general revenue
  pledge, which allows the pledging of revenues of
  the auxiliary enterprises, unrestricted endowment
  income, fees (not including tuition) collected by
  the University and overhead receipts.
• External borrowing are centrally managed on a
  portfolio basis, allowing economies of scale,
  interest rate risk management practices, and
  cheaper borrowings.
• Internally, Finance charges a blended rate to
  departments that reflects a weighted-average of
  the interest rates on outstanding external debt.
  As a result, the timing of projects will not have
  a significant impact upon the interest rate borne
  by the department.

Old Method (selected examples for illustration)
New Method (selected examples for illustration)
Utility Systems
Utility Systems
Student Union Center
Student Union Center
Parking
Housing
Parking
Housing
a
b
c
d
e
f
BLENDED RATE
g
Central Bank
Parking Series 1997A
Dormitory Series 1997A
Utilities Series 1993
a
b
c
d
Gen Rev Series 2001B
Gen Rev Series 2001C
Gen Rev Series 2002
Gen Rev Series 2001A
Dormitory Series 1997B
Utilities Series 1997
SUC Series 2000
Parking Series 1997B