Wayne State University

Aim Higher

Board of Governors

Wayne State University Statutes

2.73.04 Debt and Debt-Related Derivatives/Swaps Management Policy PURPOSE

The purpose of this policy (the “Policy”) is to provide a framework for the prudent use and management of debt and debt-related derivatives as a valuable resource of Wayne State University (the “University”).  The term “Debt” is further defined below in Section III to include debt-related derivatives.  Prudent management of debt and derivatives/swaps can help the University achieve its institutional mission and strategic objectives through efficient, timely and low-cost access to the capital markets.  This Policy identifies the University’s goals of striking an appropriate balance between borrowing costs, access to capital markets, financial flexibility, and mitigation of risk over both the short-term and long-term. POLICY

General Policy

The University will incur Debt to fund capital projects only with the prior approval of the Board of Governors.

The University will use Debt to fund only mission-critical capital projects to ensure that debt capacity is optimally utilized to fulfill the University’s mission.  Projects that relate to the core mission will be given priority for debt financing; projects with associated revenues will receive priority consideration as well.

The following matters are to be considered when using Debt to fund capital projects:
  • In assessing the possible use of Debt, other financing and revenue sources are to be considered as well, including State appropriations, philanthropy, project-generating revenues, grant revenues and other sources.
  • Every project to be financed by Debt must have a defined, supportable plan of costs approved by University Administration.
  • Debt financings should be coordinated to minimize the fixed costs of undertaking a borrowing.

The University will manage Debt on a portfolio rather than a transactional or project-specific basis with a focus on lowering the University’s average cost of capital and limiting Debt service cash flow volatility.

The University will seek to manage Debt to incorporate an appropriate balance of floating and fixed interest rate exposure.  The University will manage the fixed versus variable interest rate Debt allocation such that the University will maintain over time a range of between 0% - 25% of the portfolio in unhedged variable interest rate debt instruments with the balance in fixed interest rate debt.  An appropriate balance may be either directly through debt financings or indirectly through the use of derivative structures and products.

The University may utilize derivatives/swaps in a prudent manner in order to take advantage of market opportunities to reduce debt service cost, interest rate risk, and financing risk.  Derivatives/swaps products may be employed as a management tool of interest rate and other Debt-related risks for either individual bond series or the aggregate Debt portfolio.  The University shall not enter into swap transactions for speculative purposes.

The University will diversify the types of fixed interest-bearing Debt that it issues, using both traditional fixed interest rate Debt and synthetic fixed interest rate Debt (created by issuing underlying variable interest rate Debt combined with a fixed interest rate derivative or swap).

In entering into interest rate swaps and other derivative transactions, the University shall:
  • Minimize counterparty risk through protections such as diversity in counterparties, assessment and monitoring of counterparty credit ratings and collateralization for credit support requirements.
  • Limit the structural risk by protections such as closely coordinating derivative amortization schedules with related Debt and using recognized market interest rate indices. Delegation of Authority

The Treasurer and the President shall:
  • be responsible to the University Board of Governors (the “Board”) for the execution of all Debt transactions, consistent with Board policies and applicable law;
  • have the authority, under Board authorization, to execute derivative transactions to manage interest rate and other risks associated with the University’s outstanding Debt.

 The Treasurer shall:
  • engage Debt advisors, underwriters, remarketing agents, swap counterparties, liquidity providers, trustees or other external parties necessary to issue or administer debt;
  • establish practices and procedures to implement the Objectives of this Policy; including the establishment of the University’s Derivatives/Swaps Guidelines (the Guidelines”);
  • execute and file the annual disclosure required by Rule 15c2-12 of the United States Securities and Exchange Commission;
  • ensure compliance with the United States Internal Revenue Service laws, rules and regulations regarding tax-exempt bonds. Reporting

The Treasurer will provide an annual report to the Board of Governors regarding:  (1) University Debt as of the fiscal year end and changes to it within the past year, (2) Debt related derivatives/swap changes within the fiscal year and the market values as of the fiscal year end, and (3) a comparison of University debt-related financial and operating statistics and ratios to rating agency medians of public institutions of higher education with comparable credit ratings. DEBT TRANSACTIONS SUBJECT TO THIS POLICY

This policy governs the overall use (including the issuance and execution) of debt and derivatives (“Debt”) including the following:
  • bonds, notes, or other forms of public or private debt borrowing including, but not limited to, commercial paper, certificates of participation, bond anticipation notes and capital leases of more than five (5) million dollars (together, “Debt Instruments”);
  • a liquidity facility, letter or line of credit, or other credit-enhancement strategies related to Debt Instruments;
  • derivative/swap products related to Debt Instruments used to hedge or manage interest rate or other debt-related risks including, but not limited to, interest rate swaps, swaptions, caps, and floors.

Legislative History
Adopted, Official Proceedings 30 January 2008

Compiler Notes

Cap/Interest rate cap: Used with variable interest rate bonds. By purchasing a cap, a borrower can limit or “cap” his maximum interest cost regardless of how high the interest rate on his loan or bond rises. When the loan or bond rate exceeds the cap limit (usually referred to as the “strike” level), the borrower pays the higher interest rate on the loan or bond. However, the seller of the cap compensates him for the exact amount of interest paid in excess of the strike price. The cost is paid up-front to the seller. Issuers/borrowers may use a cap rather than getting fixed rate debt so they can take advantage of floating rate debt which is generally lower than fixed rates and yet be assured their interest costs will be capped at an agreed-upon level.

Counterparty: A participant in a swap or other derivatives agreement who exchanges payments based on interest rates or other criteria with another counterparty.

Derivatives: Financial instruments whose value is derived from the value of something else. They generally take the form of contracts under which the parties agree to payments between themselves based upon the value of an underlying asset or other data at a particular point in time. The main type of derivatives for the University’s purposes are swaps, forwards, and options.

Floor/Interest rate floor: Used with variable interest rate bonds. By selling an interest rate floor, a borrower places a limit or “floor” on his minimum interest cost regardless of how low the interest rate on his bond falls. In exchange, the seller of the floor (i.e., the borrower) receives an upfront payment from the buyer. When the bond rate falls below the floor (usually referred to as the “strike” level), the borrower pays the lower interest rate on the loan or bond. However, he compensates the buyer of the floor for the difference between the exact amount of interest which would have been paid at the strike level and the amount of interest actually paid.

Forwards: A contract which gives the holder the obligation to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.

Hedge: A transaction entered into to reduce exposure to market fluctuations or other debt-related risks.

Remarketing Agent: A dealer or bank responsible for the pricing of variable-rate instruments, including variable-rate demand bonds. The remarketing agent periodically sets/resets the interest rate of a variable rate instrument. If bonds are tendered, the remarketing agent will use best efforts to resell the tendered bonds.

Swap/Interest Rate Swap: A transaction in which two parties agree to exchange future net cash flows based on predetermined interest rate indices calculated on an agreed-upon notional amount. In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate payment to the other counterparty. The fixed or floating rate is multiplied by a notational principal amount (the amount of the underlying bonds). This notional amount is not exchanged between counterparties, but is used only for calculating the size of cash flows to be exchanged.

Options: Financial instruments that convey the right, but not the obligation, to engage in a future transaction based upon some underlying security or index.

Synthetic fixed interest rate Debt: Underlying variable or floating interest rate bonds that are combined with a fixed interest rate derivative or swap.

Swaption: A swaption is the combination of an interest rate swap and an options contract. It is an option granting its owner the right but not the obligation to enter into an underlying swap. The buyer and seller of the swaption agree on the premium (price) of the swaption. There are two types of swaption contracts: 1) a payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg; and 2) a receiver swaption gives the owner of the swaption the right to enter into a swap where they will receive the fixed leg, and pay the floating leg.

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