Long-term Debt Policy

Long-term Debt Policy

Topic: Financial and Operations
Approval Authority: Board of Governors
Approval Date: February 27, 2024
Effective Date: January 1, 2022

1. Purpose

Capital projects and other university priorities require a combination of funding sources including internal reserves, external debt, gifts, future revenue streams, and grants.  Debt is an integral component of the University’s overall capital structure.

The purpose of this policy is to ensure that the University has a robust debt management and monitoring review process. The policy will provide credit rating agencies, the holders of University debt, and other external partners, such as the Ministry of Colleges and Universities, with comfort that the University has a disciplined approach to managing its long-term debt obligations. This policy assists in ensuring that debt is used strategically to support the University’s mission and strategy.

2. Scope and Application

This policy applies to all long-term debt assumed by the University.

3. Principles and Definitions

In order that present and future University administrations preserve the overall financial health and credit worthiness of the University, the University monitors and manages its long-term debt obligations, and develops and updates its strategy to retire or refinance its debt. The University may use debt to finance long-term capital projects, including ancillary capital projects.

The University will not use long-term debt to finance operations.

4. Policy

4.1 The University will maintain the following key financial ratios.

a. Debt per FTE ($)

Measures debt per Full Time Equivalent

Total university debt ÷ FTEs

Where total university debt includes:

  • Long-term debt (debentures, bank loans, long-term credit facilities)
  • Public-private partnership obligations
  • Capital leases
  • Less: Sinking fund assets

And where FTEs is the number of enrolled students on a standard credit load basis

Maximum debt per FTE ($) =12,250

b. Viability Ratio   

Measures assets available to settle long term debt

Expendable Net Assets ÷ Total university debt

Where expendable resources includes:

  • Internally restricted endowments
  • Internally restricted net assets (excluding investment in capital assets and employee future benefits and other amounts which are committed to near term uses or otherwise restricted
  • Unrestricted surplus (deficit)

Minimum Expendable Net Assets to Debt = 80%

c.  Debt Ratio  

Measures extent of University’s leverage

Total Liabilities less Deferred Capital Contributions/Total Assets

Maximum Debt Ratio = 35%

d. Debt to Revenue Ratio

Measures ability to repay debt

Long Term Debt/Total Revenue

Maximum Debt to Revenue Ratio = 50%

e.  Interest Burden Ratio

Measures debt affordability

Interest Expenses/Total Expenses less Amortization

Maximum Interest Burden Ratio = 4%

f. Interest coverage (times)

An institution’s interest coverage ratio (adjusted Operating Cash Flows-to-interest charges) is a key metric tracked by credit rating agencies to assess capacity to meet annual debt servicing requirements with cash generated from operations.

Adjusted cash flow from operations + gross interest charges÷ gross interest charges

Where adjusted cash from operations is:

  • Excess of consolidated revenue over consolidated expense (as reported)
  • Amortization
  • Less: other non-cash adjustments (before change in working capital).

Minimum interest coverage (times) = 2.5 times

g. Surplus to revenue (five-year rolling average) (%).

Measures financial sustainability

The credit assessment of an institution is often assessed based on an historical five-year rolling average of this ratio, where the adjusted surplus (deficit) is the excess of consolidated revenue over consolidated expense (as reported), less any non-recurring/ one-time revenue or expenses.

Minimum Surplus-to-revenue (five-year rolling average) (%) = 2%

Summary of Key Financial Ratios

Key Financial Ratio Min/Max
Debt per FTE ($) < 12,250
Viability Ratio (%) >80
Debt Ratio (%) <35
Debt to Revenue (%) <50
Interest Burden Ratio (%) <4
Interest coverage (times) >2.5
Surplus to revenue (five-year rolling average) (%) >2

4.2 When the University is not compliant with a debt policy metric, administration will undertake a comprehensive review and provide a report with recommendations to the Finance and Audit Committee on how to obtain compliance.

4.3 The University will maintain a sinking fund, to repay at a minimum 50% of the total balance of long-term debt.  The sinking fund will be invested in either the University’s Short-Medium Term Fund or alongside the University’s Endowment Fund and be governed by their respective Statement of Investment Policies and Procedures.   On a biennial basis, the Finance and Audit Committee will review the value of the sinking fund relative to projected target and consider recommendations to increase the sinking fund to ensure sufficiency of funds to repay principal.

5. Monitoring

On an annual basis, the Finance and Audit Committee will review the University’s debt management, which will include the following:

  • A review of the University’s debt rating, as provided by debt rating agencies
  • A review of the University’s debt rating as compared to other universities
  • The financial metrics outlined in this policy

6. Review

This policy will be reviewed biannually to consider changes in the University’s objectives and the external environment.

 

Legislative History: Approved by the Board of Governors: 4 May 2021; Revised and approved by the Board: 28 February 2023; Revised and approved by the Board 27 February 2024
Date of Next Review: March 1, 2026