Financial Services

University Policy on Capital Debt Management

Policy No.
UP09/12
Function
Financial Management
Authoring Organisational Unit
Treasury and Investments
Date Approved
01/06/2006 Revised 01/03/2015
Next Review Date
01/08/2016
Approving Body
Senate

The University of Western Australia

University Policy on: Debt Management

Purpose of the policy and summary of issues it addresses:

The University has established the Debt Management Policy (formerly the Capital Debt Management Policy) as a governance framework for any external borrowings. This policy was originally approved by Senate in 2006 and sets out requirements in relation to purpose, financial restrictions and ratios, source and structure of borrowings and internal monitoring, reporting and accountability requirements.

Definitions:

Borrowing Costs mean interest and other costs the University incurs in relation to the borrowing of funds.

Borrowing Cost Percentage is a KPI under the University's Debt Management Policy which measures the University's capacity to service the debt from the known source of funding to the capital program. Calculation formula: Borrowing Cost / University Capital Funding.

Capital Asset means any capital works project capitalised and depreciated over useful life of fifty years upon project completion, as defined by University accounting policies.

Other Capital Asset means any capital works project capitalised and depreciated over useful life less than fifty years upon project completion but does not relate directly to minor maintenance, minor improvements or operating costs.

Capital Funding means the funding set aside or allocated for the capital program, being capital expenditure on capital projects. Sources of capital funding include Internal budget allocation funds allocated by the University to the Capital Program and are generally sourced from commonwealth government funding, student fee contribution, investment income and distribution from the Endowment Fund; and External funds such as those granted by the commonwealth or state government or donated by outside parties for the specific purpose of capital development.

For the purpose of debt management, funding expended on maintenance and internal borrowings are specifically excluded from the definition of capital funding.

Current Capacity Ratio is a KPI under the University's Debt Management Policy which measures the University's ability to meet current debt obligations from liquid cash and investment assets.

Calculation formula: Unrestricted Investment Assets/Current Debt.

Debt Services Costs include Borrowing Costs and scheduled regular principal repayments but excludes temporary debt reduction.

Debt Service Coverage is a debt covenant under the University's Debt Management Policy which measures the University's capacity to meet is debt servicing obligations from operating cash flows.

Calculation formula: Operating surplus before interest and depreciation (OSBID)/Debt Service Costs

Endowment Assets mean the assets of the Endowment Fund, being the assets originating from the 1904 endowment by the State of Western Australia for the purpose of establishing the first state University.

The use of the Endowment Fund is subject to certain terms and conditions pursuant to the University of Western Australia Act 1911.

Endowment assets do not include the broader definition of endowments, being any conditional gift to the University for a specified purpose, generally with a notion of preserving the capital of the gift. These gifted assets are referred to a bequest & donated assets.

Endowment Investment Assets mean Endowment Fund assets invested via the University's investment portfolio through its Long Term Pool, Short Term Pool, Cash Pool and Property Pool. These assets could be liquidated in a short time period.

Funds from Operations/Revenue is a KPI under the University's Debt Management Policy which gives an understanding of the University's relationship between revenue and operational cash flow. The ratio also provides the University with insight into the stability of the relationship and potential for changes in revenue to impact the availability of cash to meet debt servicing and other obligations.

Calculation formula: Funds from Operations/Revenue

Gearing Ratio is a debt covenant under the University's Debt Management Policy which measures the University's debt to net assets.

Calculation formula: Total Debt/Equity

Identified Restricted Assets mean restricted assets which by nature are not available to meet other University costs (including debt service costs) such as research and donated funds.

Restricted Endowment Assets are not identified as restricted for the purpose of calculating the modified gearing ratio as the annual distribution from the Endowment Fund to the University is classified as unrestricted general purpose income.

Investment Assets mean assets invested by the University for the purpose of deriving an investment return. Investment assets are largely invested through investment pools. Investment assets consist of relevant other financial assets and cash in the Balance Sheet.

Real Property Leasehold Interest means a leasehold interest is a grant for exclusive possession of property over a specified area for a specified period of time under specified conditions.

Long Term Real Property Leasehold Interests means the leasehold interest is granted for land, buildings or infrastructure, the term of the leasehold interest is not less than the useful life of the asset or 50 years and the leasehold interest is recognised as a finance lease under the Australian Accounting Standards and other regulatory frameworks.

Minimum Level of Unrestricted Funds is a risk management strategy calculated as the amount of the established borrowing facilities (excluding overdraft or liquidity facilities) times the benchmark current maturities at clause 5.5

Modified Gearing Ratio is a KPI under the University's Debt Management Policy which measures the University's debt to modified net assets. A gearing ratio is a standard financial ratio, and has been modified to eliminate certain restricted assets.

Calculation formula: Total Debt / (Net Asset excluding Identified Restricted Assets).

Outside Funds mean funds held by the University for its Affiliates and other associated entities.

Restricted Assets mean assets which are considered to be of a specific restricted nature due to an external requirement and may include research funds, specific bequest and donated funds and special collections.

Self-Supported Capital Assets mean Land, building or infrastructure assets which generate additional net income through an income stream or budgetary savings that is sufficient to support debt service costs and support approval of a business case as a standalone project.

University Supported Capital Assets mean land, building or infrastructure assets for institutional purposes which assist in fulfilling the University's vision and strategic objectives and are acquired or developed due to a significant contribution from general University funds.

Unrestricted Assets mean assets for which the University fully controls the use of those funds.

Unrestricted Income means unrestricted income as defined by the University for Financial Reporting Requirements. In principal, unrestricted income is any income available for general use by the University.

Policy statement:

1 Definition

1.1 The terms used in this policy are defined in Schedule A.

2 Application

2.1 The Debt Management Policy covers the operation of the University's Debt Portfolio, primarily established in relation to the University's capital asset management plan for:

2.1.1 Capital assets; and

2.1.2 Long term real property leasehold interests.

2.2 The Policy applies to all University borrowing from external sources including by way of overdraft facilities, loans, or any other credit facility.

2.3 The Policy does not apply to debts arising from ordinary operations such as accounts payable, advances, credit card facilities and other amounts owing through the normal course of business.

3 Legal Review

3.1 All forms of external finance under the Policy are to be established by a written contract.

3.2 The terms of all contracts must be carefully examined and reviewed by Legal Services before pursuing any particular course of action.

4 Debt Source

4.1 Debt shall be obtained in aggregate amounts of $1,000,000, by way of:

4.1.1 Western Australian Treasury Corporation or other State based borrowings;

4.1.2 ADI's or other lending institutions borrowings; or

4.1.3 Direct capital market issues.

4.2 The following shall be taken into account when determining source of debt financing:

4.2.1 the relative cost of capital, terms and form of debt products that can be obtained from the financier;

4.2.2 the current level of credit facilities with the financier and the ability and timeframe to increase or establish credit facility limits; and

4.2.3 the provision of specialist financing skills desirable to the financing arrangement.

4.3 The University will seek to borrow funds at the lowest cost of capital within the context of a risk management framework after consideration of cost of borrowing, associated fees and charges and administration requirements and specific contractual requirements including guarantee provisions and charge over assets.

4.4 Wherever possible, the University shall borrow funds on an unsecured or a floating charge basis. The University may seek to borrow on an unsecured basis subject to the Treasurers Guarantee as permitted under the University of Western Australia Act 1911(WA).

4.5 The term of borrowings shall be based on the following as appropriate for the type of borrowing:

4.5.1 The purpose of the borrowings; University-supported capital assets, self-supported capital assets or liquidity;

4.5.2 The average useful life of capital projects or the expected useful life of the self-supporting capital asset;

4.5.3 The term the self-supporting asset generate sufficient additional net revenue to meet interest and principal repayments;

4.5.4 A term of 10 years, or a lesser average term for rolling long-term facilities or where specifically approved by Senate.

4.6 Self-supported capital borrowings impact the total amount of borrowings available for the University. Business units directly benefiting from self-supported capital asset projects will be encouraged to provide a capital contribution to the project to reduce the level of debt required.

5 Debt Structure

5.1 The University's external financing operations shall be managed on a debt portfolio basis to ensure a coordinated approach and to optimise portfolio effectiveness. Any borrowings in relation to specific activities must be assessed as part of the University's Debt Portfolio.

5.2 The debt structure shall be determined based on the dual objectives of lowering the average cost of capital and providing budget and cash flow certainty within an acceptable level of risk, over time.

5.3 The Debt Portfolio shall be diversified across a range of debt maturities interest rate exposures, so as to provide characteristics of both fixed and variable rate debt over varying time horizons.

5.4 A mix of fixed and floating rate debt may be desirable to minimise both cost of capital and risk. The mix shall be determined in light of the borrowing environment and purpose.

5.5 The University is required to structure the Debt Portfolio within the minimum and maximum ranges outlined in Attachment A , subject to approved drawdown transitional arrangements. Any variation will require specific management and Executive approval.

5.6 The appropriateness of the mix of debt shall be formally assessed at least once each year in light of any fundamental changes in interest rates and the borrowing environment.

6 Debt Covenants and Restrictions

6.1 The University shall access only a limited amount of borrowing to ensure the University maintains a strong financial position and credit rating.

6.2 Borrowed funds shall only be used:

6.2.1 For capital assets or in accordance to clause 6.3, as set out in the borrowing documents; or

6.2.2 For the purposes of an established overdraft or liquidity facility.

6.3 Borrowed funds shall only be used for long term real property leasehold interests and other capital asset on the specific authority of Senate.

6.4 Attachment B sets out the debt covenants against which the University's borrowing limit will be evaluated and under which the Debt Portfolio is required to operate.

6.5 If in any circumstances the debt covenants are exceeded, the University management is required to undertake such action as necessary, to return the University to within limits as soon as practical.

6.6 Senate shall approve remedial action on receipt of a detailed documented strategy for returning ratios to an acceptable level over an agreed timeframe acceptable to financiers.

6.7 All borrowings must be in Australian currency. Foreign currency borrowing is not permitted without specific approval of the Senate including reference as to how currency risk shall be managed.

7 Debt Administration

7.1 The University's Debt Portfolio is to be managed and approved in conjunction with the University's capital asset management plan and capital budget and University Treasury forecasts. The University's capital budget and debt budget shall be monitored by University management.

7.2 The University's capital asset management plan and capital budget shall be prepared at least annually. The timing of capital borrowings shall be coordinated to ensure sufficient liquidity to meet projected outflow of funds under the capital asset management plan, without undue surplus borrowings.

7.3 A proposal shall be prepared to increase the established borrowing facilities amount.

7.3.1 The business case for University-supported capital assets or overdraft or liquidity facilities is based on the general financial strength of the University rather than the financial viability of specific projects.

7.3.2 The business case and financial plan for self-supported capital assets must include the costs and repayment of any related debt, and is subject to Senate approval on a case-by-case basis.

7.4 Borrowing cost shall be paid as and when due and not be added to the borrowing amount.

7.4.1 The capitalisation or expense of borrowing costs is to be determined under the University's accounting policy and applicable accounting standards.

7.4.2 The borrowing costs for University-supported capital borrowings will be charged to the Capital Program, and for self-supported capital borrowings will be charged to the project in accordance with the University's user pays principle.

7.5 Debt shall be repaid as per the terms of the debt agreements. Rolling refinancing arrangements may be established.

7.5.1 Refinancing arrangements for large maturities shall be assessed and established six months in advance of maturity or as otherwise determined by the Chief Financial Officer. Attachment C sets out the large maturity profile against which the University's refinancing risk will be evaluated

7.5.2 Borrowings may be repaid or restructured when opportunities arise which present positive savings and/or support the strategic objectives of the University.

7.6 A Debt Repayment Reserve is established under the policy. The amount of funds set aside and held in the reserve (if any) shall be determined on the recommendation of the Chief Financial Officer based on a risk assessment of debt maturities and the funding buffer between the minimum level of unrestricted funds and the actual and forecast level of unrestricted funds.

7.7 Any temporary surplus funds arising from borrowed funds shall be invested in the Cash Pool or the Short Term Pool pending utilisation.

8 Risk Management

8.1 The Debt Portfolio shall be managed to ensure the University has sufficient access to liquidity and established facilities to meet its financial obligations as they fall due.

8.2 The Debt Portfolio shall be managed to ensure an acceptable level of risk, ensure compliance with debt covenants and borrowing facilities contractual undertakings and provide long term certainty.

8.3 Risks shall be minimised by ensuring outstanding debt has a diversified maturity profile and an appropriate interest rate exposure mix. The term of the borrowing may be varied to take into consideration the interest rate environment.

8.4 Derivatives are permitted to hedge risks such as interest rate caps and swaps to assist with the effective management of the debt portfolio. Use of derivatives is to be in accordance with independent advice and separately approved by the Senate.

8.5 The identified specific financial risks and risk management strategies is outlined in Attachment D . Management is responsible for implementing the University's debt risk management strategy.

9 Authorisation and Governance

9.1 Senate has the ultimate responsibility for the management of the University's Debt Portfolio. It does so by:

9.1.1 Establishing the strategic framework for the University's external borrowings;

9.1.2 Approval of the Debt Management Policy and any subsequent amendments; and

9.1.3 Approval of borrowing proposals or other debt arrangements.

9.2 As the relevant subcommittee of the Senate, the Strategic Resources Committee has overall responsibility for the oversight of the Portfolio on behalf of the Senate. Its responsibilities include but not limited to:

9.2.1 Review the Debt Management Policy and subsequent amendments recommended by the Chief Financial Officer;

9.2.2 Review the recommended approach to external borrowings within the framework approved by Senate;

9.2.3 Review borrowing proposals or other debt arrangements; and

9.2.4 Monitor the performance of the Portfolio.

9.3 The Chief Financial Officer is responsible for the management and operation of the Portfolio, including:

9.3.1 The draft and routine review of the Debt Management Policy;

9.3.2 The draft and recommendation of borrowing proposals;

9.3.3 The recommendation of debt management strategies;

9.3.4 Monitoring and reporting on the performance of the Portfolio;

9.3.5 Monitoring the compliance with the debt restrictions, policy and contractual obligations and report to the Strategic Resources Committee pursuant to this policy;

9.3.6 Appointment and termination of external advisors; and

9.3.7 Management of any other issues that arise in relation to the Portfolio.

9.4 Unless otherwise provided by this policy, the Chief Financial Officer shall have specific delegated authority in relation to the day to day management of the Debt Portfolio, as approved by the Vice Chancellor.

9.5 Individual Faculties, School or cost centres are not legal entities and as such are not permitted to borrow funds.

9.6 Unless otherwise provided by this policy, the University shall comply with other University policies in relation to Governance and Recordkeeping as established and amended.

10 Performance Reporting and KPIs

10.1 The University Debt Portfolio will be monitored on a monthly, quarterly and annual basis, with an annual assessment of rolling one, three and five-year results.

10.2 The principle goals in monitoring the Portfolio are to assess:

10.2.1 the effectiveness of the source and structure of the borrowings;

10.2.2 the management of associated financial risks;

10.2.3 the capacity to service the level of debt and the potential impact on the University's credit standing; and

10.2.4 that this policy and the terms and conditions imposed by lenders are strictly complied with.

The Chief Financial Officer shall provide reports quarterly and annually to the Strategic Resources Committee and annually to the Audit and Risk Committee.

10.3 Attachment E sets out the debt key performance indicators for internal use which together with the debt covenants as defined in clause 6.4 provide the key measures against which the established borrowing facility and any increases in borrowing facility are assessed.

10.4 The Chief Financial Officer shall report to the Strategic Resources Committee on the commencement, material amendment and/or termination of any debt arrangement.

10.5 Any non-compliance with this policy and lender's requirements shall be reported immediately to the Chief Financial Officer and Chief Operating Officer and where material the Vice-Chancellor and Chair of the Strategic Resources Committee; and to the next scheduled meeting of the Strategic Resources Committee.

10.6 Any remedial action to resolve non-compliance with this policy shall be approved by the Chief Operating Officer and Vice-Chancellor on the recommendation of the Chief Financial Officer.

11 External Advisors

11.1 Professional advisors may be appointed from time to time to assist with:

11.1.1 The University's debt raising activities;

11.1.2 The review of the Debt Management Policy where the extent or type of change recommended is considered significant or at any other time it is deemed appropriate;

11.1.3 Any other activities the University deems necessary; or

11.1.4 Where requested by Senate or the Strategic Resource Committee.

12 Review of Policy

12.1 This Policy shall be formally reviewed every two years or more frequently if circumstances warrant.

12.2 The policy reviews shall be convened by the Chief Financial Officer and recommendations for change documented and presented to Strategic Resources Committee for recommendation to Senate.

13 Effective Date of Policy

13.1 The Debt Management Policy comes into effect immediately upon being approved by Senate and replaces any previous policies.

Related forms: (Link)

TRIM File No:

F15064

Contact position:

Manager, Treasury & Investments, Financial Services

Related Policies or legislation:

The University of Western Australia Act 1911