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CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier

Debt Capacity. CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier. Objective and Process. How do we finance a large number of capital needs? Currently have over $200 million in debt, including a $150 million bond Provided some internal analysis. Board is debt adverse

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CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier

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  1. Debt Capacity CAUBO Winnipeg, June 17, 2008 Presentation by Lucie Mercier-Gauthier

  2. Objective and Process • How do we finance a large number of capital needs? • Currently have over $200 million in debt, including a $150 million bond • Provided some internal analysis. • Board is debt adverse • Decided to do an RFP to find a consultant to help determine our debt capacity and to help us develop a capital financing plan for another $150 million capital plan • Selected an American consulting firm Prager, Sealy & Co. Debt capacity - CAUBO June 2008

  3. Methodology Achieving financial goals through total balance sheet management • Articulate expected long-term and short term investment returns • Determine amount of liquidity required/desired then invest unused portion • View total assets & total liabilities as ‘portfolios’ • Establish process & timeline for analyzing and implementing proposed strategies • Determine appropriate financing sources for projects on University-wide basis • Compare actual and / or opportunity cost of spending internal vs. using external funds. • Debt capacity - CAUBO June 2008

  4. Analysis • Analysis of the last 5 years financial statements • Development of three different sets of assumptions (basic, most probable, worst case) for major revenues and expenses • 5 year forecast and testing of these scenarios • Impact of these scenarios on our debt capacity and ratios • Development of sensitivity analysis (what if scenarios) • Development of a liability management policy Debt capacity - CAUBO June 2008

  5. Major Assumptions • $150M new 5-year capital plan • Internally finance $75 M and externally borrow $75 M • Invest part of operating cash in a long-term investment strategy • Assumptions for major revenue and expenses • Maintain future debt capacity Debt capacity - CAUBO June 2008

  6. Proposed Ratio Limits Debt capacity - CAUBO June 2008

  7. Three Monitoring Ratios (continued) Why choose these indicators • Industry standard – key determinants for credit agencies • Easily calculated – elements found in higher education reports, enabling direct comparison and benchmarking • Simplification – to assist both Management and Governing bodies in reviewing and making policy decisions Establishing thresholds • Established from the median leverage levels in AA category in both Canada and U.S. Debt capacity - CAUBO June 2008

  8. If the Ratios Go OffsideProcess and Remedies • 5 year forecast refreshed on an annual basis, so we can plan for deviation • If two out of the three ratios go to: • Debt-to-FTE over $ 9 000 (maximum upper limit $ 10 000) • Unrestricted liquidity-to-debt: under 0.6 (threshold 0.5) • Interest coverage: under 3.00 (threshold 2.50) • Yellow flag Under management review Policy Management Debt-to-FTE $ 10 000 $ 9 000 Liquidity-to-debt ratio 0.5 x 0.6 x Interest coverage ratio 2.5 x 3.0 x 3. If necessary, action plan to rectify the pending situation (reduction of operational expenses, delay or scale down projects, etc.) Debt capacity - CAUBO June 2008

  9. Sensitivity Analysis Debt capacity - CAUBO June 2008

  10. Sensitivity Analysis (continued) • Fluctuation of 0.2 x will be produced by: • Liquidity-to-Debt: fluctuation of $ 60 M in net assets • Interest Coverage: ▪ Fluctuation of $ 5 M in revenues or expenses ▪ Fluctuation of $ 1.5 M in interest expenses • Conclusion: Interest Coverage ratio has a greater risk of fluctuation Debt capacity - CAUBO June 2008

  11. Annual Review • Internally: • Review assumptions for 5-year forecast and refresh analysis • Forecast ratios • Review sensitivity analysis • Review capacity to finance debt from operations • Determine need for debt • Presented and reviewed annually by the Treasury Committee • Any decision to borrow externally must be approved by the Board of Governors • All capital projects are approved by the Board of Governors Debt capacity - CAUBO June 2008

  12. Presentation to DBRS and Moody’s • Presentation to DBRS and Moody’s to present: • The $150 million Five-Year Facilities Renewal and Expansion Plan • The new proposed Liability Management Policy • The Governance Structure for Capital Plans and Borrowing • Both DBRS (AA) and Moody’s (Aa2) support our strategy • Support the new liability management policy • Viewed as good discipline • Confirmed our credit ratings Debt capacity - CAUBO June 2008

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