Annual Capital Finance & Debt Management Report FY2012. University of Minnesota Finance Committee February 7, 2013

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1 Annual Capital Finance & Debt Management Report FY2012 University of Minnesota Finance Committee February 7,

2 Outline of Presentation Guiding Principles of Debt Issuance University s Capital Structure Credit Rating Key Financial Indicators Peer Group Analysis 2

3 Issuance of Debt Guiding Principles Cannot use debt transactions to fund operating costs Use taxable debt when financial considerations indicate its use is in the best interest of the University Preserve core long-term debt ratings at Aa/AA category and short-term core debt rating of A-1/P-1 Receive an investment grade credit rating for special purpose debt Maintain key financial metrics to assure continued access to capital markets Minimize borrowing costs at acceptable levels of risk over life of the issue Maintain portfolio of variable and fixed-rate debt that is in the long-term best interest of the University. 3

4 Long-Term Debt As of June 30, 2012 (000s omitted) Interest Rate Due at various dates through fiscal year Beginning Balance Additions Reductions Ending Balance General Obligation Series 2011D * 2.00%-5.00% 2037 $ 0 $ 60,964 $ 156 $ 60,808 General Obligation Series 2011C *.90% 4.56% , ,322 General Obligation Series 2011A * 2.00%-5.50% ,073 19, ,776 General Obligation Series 2010B.74%-5.02% , ,800 General Obligation Series 2010C&D * 2.00%-5.77% 2016; ,770 1,440 33,330 General Obligation Series 2009C&D * 1.50%-6.30% 2022; ,203 3,170 77,033 General Obligation Series 2009A&B * 2.50%-6.00% 2029; ,677 1,704 54,973 General Obligation Series 2001B variable Commercial Paper Notes Series A, B, C, D.10%-.32% ,600 18, ,350 Obligations to the of Minnesota pursuant to Infrastructure Development Bonds (IDB) 3.55%-6.90% , ,639 Auxiliary revenue bonds 3.0% , ,420 Special purpose bonds Series 2011B * 3.00% % , ,736 Special purpose revenue bonds Series 2010A * 3.00%-5.00% ,840 1, ,629 Special purpose revenue bonds Series 2006 * 4.00%-5.00% ,353 4, ,584 Capital leases and other 1.72%-8.00% ,022 1,895 1,929 5,988 TOTAL PER FINANCIALS $ 1,145,419 $ 140,074 $ 59,105 $1,226,388 * Net unamortized premium/discount is included in beginning and ending balances 4

5 Current Amortization Structure (in millions) 6/30/12 Outstanding University Bonds & Commercial Paper Plus Gateway Debt Principal Outstanding $1,000 $900 $800 $700 $600 $500 $400 $300 $913.5 $859.7 $806.3 $751.1 $693.4 $634.0 $572.3 $306.9 $298.3 $288.6 $278.5 $267.9 $256.9 $245.3 $200 $100 $52.6 $51.9 $51.2 $50.5 $49.8 $49.0 $48.2 $ University Debt Supported Bonds Gateway Corporation 5

6 Long Term Debt Analysis 6/30/2011 6/30/2012 Total Outstanding per financials $ 1,145.4 million $1,226.4 million Less: Capital leases and other (6.0) million (6.0) million University Bonds and Commercial Paper $ 1,139.4 million $1,220.4 million University Supported $ million $ million Supported Bonds $ million $ million Fixed Rate* / Variable Rate 89% / 11% 91% / 9% University Issued* / Issued 97% / 3% 97% / 3% University Issued Weighted Average Fixed Rate* 3.97% 3.97% University Issued Weighted Average Variable Rate 0.24% 0.17% University Issued Weighted Average * 3.59% 3.62% Issued Fixed Rate 4.66% 4.74% Total Weighted Average University Debt 3.63% 3.65% Gateway Corporation $ 53.2 million $ 52.6 million * Includes Supported Special Purpose Revenue Bonds Series 2006, 2010A, & 2011B 6

7 Credit Rating and Debt Capacity Determinants Student Demand - Strong Aa Management Analysis 20% Student Demand 20% Solid student market position Financial ment Analysis - Strong Aa Strength of General Obligation pledge Debt Burden 10% Operating Performance 10% Financial ment Analysis 30% Support 30% Solid financial resources particularly relative to debt and enrollment Debt per student in line with peers Debt service as a percentage of budget is moderate Support - of Minnesota Aa1/AA+ Liquidity 10% History of strong appropriations, but budget pressures continue Management Analysis - Strong Aa Analyst s assessment of University management strength Research position and strategy An analysis of student demand, market position and financial indicators places the University of Minnesota solidly in the strong Aa category. Debt capacity and credit ratings are not a function of ratios alone, but are highly dependent on other factors such as debt strategy, essentiality of debt, future fundraising, revenue producing capability and debt structure. 7

8 Letter Ratings to Designate University Credit Quality Moody s Investors Service Rating Aaa Aa1, Aa2, Aa3 A1, A2, A3 Baa1, Baa2, Baa3 Ba1, Ba2, Ba3 B1, B2, B3 Caa to C Financial Security Evaluation Exceptional Excellent Good Adequate Moderate Weak Default Standard and Poor s Rating AAA AA+, AA, AA- A+, A, A- BBB+, BBB, BBB- BB+, BB, BB- B+, B, B- CCC to D The University of Minnesota is currently rated Aa1 by Moody s, and AA by Standard and Poor s. 8

9 Key Financial Metrics RATIO KEY COMPONENT DEFINITION A - Total Financial Resources to Modified Direct Debt B - Expendable Resources to Modified Direct Debt C - Debt Service to Operations Total financial resources Measure of the total financial wealth of the institution Expendable resources Measure of financial resources that are ultimately expendable Modified direct debt Measure of the direct obligations of the institution Debt service Actual principal & interest paid Operations Measures size of operating budget Unrestricted net assets + restricted expendable net assets + restricted nonexpendable net assets + University foundations total net assets less foundations net investment in plant Unrestricted net assets + restricted expendable net assets + University foundations unrestricted/temporarily restricted net assets less foundations net investment in plant The sum of the University s outstanding debt including capital leases, plus Gateway debt, less the special purpose debt (i.e., statesupported stadium debt and 75% of the biomedical facilities bonds) Sum of the principal and interest paid on capital debt by the University excluding principal and interest on the special purpose debt University operating expense less scholarships & fellowships, plus interest on capital asset-related debt, excluding the interest on the special purpose debt 9

10 University of Minnesota: Analysis of Key Credit Ratios Resources and Leverage Total Resources to Modified Direct Debt 525% 492% 473% 475% 425% 375% 325% 331% 349% 374% 375% 410% 275% 225% 175% 125% 75% 287% 256% 194% 207% 217% 217% 100% 2011 range 25% University of Minnesota Moody's "Aa1" Medians Desired Trend Unrestricted net assets + restricted expendable net assets + restricted non-expendable net assets + University foundations total net assets foundations net investment in plant Divided by Modified Direct Debt 10

11 University of Minnesota: Analysis of Key Credit Ratios Resources and Leverage Expendable Resources to Modified Direct Debt 510% 410% 310% 210% 363% 340% 219% 236% 261% 262% 250% 110% 10% 179% 162% 131% 143% 164% 164% % 2011 range University of Minnesota Moody's "Aa1" Medians Desired Trend Unrestricted net assets + restricted expendable net assets + University foundations unrestricted net assets + University foundations temporarily restricted net assets foundations net investment in plant Divided by Modified Direct Debt 11

12 University of Minnesota: Analysis of Key Credit Ratios Resources and Leverage Debt Service to Operations 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 3.1% 2.9% 2.8% 3.1% 2.7% 2.6% 2.6% 2.0% 4.25% 3.1% 3.1% 3.0% 3.0% 2.2% range University of Minnesota Moody's "Aa1" Medians Desired Trend Actual Annual Debt Service Divided by Total Operating Expenses (as adjusted) 12

13 Projected Long Term Debt as of June 30, 2013 (in millions) University Special Supported Purpose* Total Balance June 30, 2012 $ $ $ 1,220.4 New issuances (par plus net premium/discount): Series 2013A GO tax-exempt Series 2013B GO taxable Subtotal 1, ,317.4 Scheduled reductions (52.3) ( 8.6) (60.9) (principal payments and net premium amortization) Projected balance June 30, 2013 $ $ $ 1,256.5 Projected interest expense FY2013 $ 34.1 $ 14.3 $ 48.4 * Special Purpose Revenue Bonds are excluded for debt capacity calculations and consist of debt issued for TCF Bank Stadium and Biomedical Sciences Research Facilities for which annual state appropriations are received to reimburse the University for the annual debt service on these bonds. 13

14 Peer Group Analysis Total Resources Direct Debt Total Resources to Direct Debt Expendable Resources to Direct Debt Debt Service as a % of Operations Expendable Resources to Operations 14

15 University of Minnesota Peer Group Analysis Total Resources ($Millions) $28,117 $25,000 $20,000 $15,000 $10,000 $5,000 $3,648 $3,185 $7,156 $3,090 $3,192 $3,628 $11,997 $2,000 $3,411 $3,823 $1,719 $0 Minnesota Indiana North Carolina Purdue Texas Washington California Ohio Penn Illinois (Aa2) Moody's Public Institutions "Aa1" Median ($2,393) Moody's Public Institutions "Aa2" Median ($1,088) Direct Debt ($Millions) $17,200 $15,000 $12,000 $9,000 $7,717 $6,000 $3,000 $0 $972 $988 Minnesota Indiana $1,792 $1,364 North Carolina $981 Purdue Texas $1,884 Washington California $858 $2,411 Ohio $1,111 Penn $1,635 Illinois (Aa2) Moody's Public Institutions "Aa1" Median ($1,078) Moody's Public Institutions "Aa2" Median ($665) Note: Direct debt for the University of Minnesota excludes Supported Stadium and Biomedical Facilities Bonds as well as indirect debt. Source for Median Values: Moody s Investors Service. 15

16 University of Minnesota Peer Group Analysis Total Resources to Direct Debt (%) 500% 400% 375% 322% 400% 325% 364% 340% 300% 200% 227% 193% 233% 140% 100% 70% 105% 0% Minnesota Indiana North Carolina Purdue Texas Washington California Ohio Penn Illinois (Aa2) Moody's Public Institutions "Aa1" Median (217%) Moody's Public Institutions "Aa2" Median (176%) Expendable Resources to Direct Debt (%) 500% 400% 300% 200% 100% 262% 219% 320% 155% 264% 168% 133% 49% 186% 90% 240% 100% 0% Minnesota Indiana North Carolina Purdue Texas Washington California Ohio Penn Illinois (Aa2) Moody's Public Institutions "Aa1" Median (164%) Moody's Public Institutions "Aa2" Median (115%) Note: Direct debt for the University of Minnesota excludes Supported Stadium and Biomedical Facilities Bonds as well as indirect debt. Source for Median Values: Moody s Investors Service. 16

17 University of Minnesota Peer Group Analysis Debt Service as a % Operations 6% 5% 4% 3% 2% 3.0% 3.4% 1.8% 5.2% 4.6% 4.0% 2.7% 5.5% 2.8% 3.5% 2.1% 2.7% 1% 0% Minnesota Indiana North Carolina Purdue Texas Washington California Ohio Penn Illinois (Aa2) Moody's Public Institutions "Aa1" Median (3.1%) Moody's Public Institutions "Aa2" Median (3.7%) Expendable Resources to Operations (%) 150% 145% 120% 90% 60% 30% 87% 82% 101% 88% 97% 65% 36% 83% 49% 59% 35% 0% Minnesota Indiana North Carolina Purdue Texas Washington California Ohio Penn Illinois (Aa2) Moody's Public Institutions "Aa1" Median (70%) Moody's Public Institutions "Aa2" Median (51%) Note: Debt service as a percentage of operations ratio for the University of Minnesota is adjusted to exclude debt service related to the Supported Stadium Bonds. Source for Median Values: Moody s Investors Service. 17

18 Annual Capital Finance and Debt Management Report FY2012 University of Minnesota Finance Committee February 7,