Debt Policy

30:10-01-16

1.0  Purpose

This document defines policy for the use of debt to finance capital projects for institutions or agencies (“Institutions”) under the governance of the Board of Regents for the Oklahoma Agricultural and Mechanical Colleges (the “Board”).  The prudent use of debt can help the Board achieve its strategic objectives while maintaining a credit rating that appropriately balances financial flexibility with the cost of capital and the needs of the Institutions.  This policy covers all obligations issued for capital projects, whether in the forms of notes, bonds, capital leases or other obligations as defined in applicable law.  The policy also includes any obligations issued under the Oklahoma State Regents for Higher Education (“OSRHE”) Master Lease Program (see Section 5.0).

2.0  Legal Authority

The Board has legal authority to issue debt pursuant to 70 O.S. 4001 et seq. (self-liquidating projects) or 70 O.S. 3980.1 et seq. (general revenue pledge obligations).  The general revenue pledge provides greater security and is expected to result in higher credit ratings and lower borrowing costs.  The Board recognizes that once the general revenue pledge is utilized for an Institution, or consortium of Institutions, under the Board’s governance for an issuance of debt, no more debt can be issued for that Institution or consortium of Institutions pursuant to 70 O.S. 4001 et seq. (self-liquidating projects).  Regardless of the direct borrowing authorization utilized, Institutions may submit requests to the Board to participate in the OSRHE Master Lease Program under the authority granted by 70 O.S. 3206.6 (personal property) and 70 O.S. 3206.6a (real property).

3.0  Approval

Any original or refunding debt issue or a contract for a derivative product requires Board approval and is subject to compliance with State of Oklahoma and federal law, any regulatory requirements and applicable Board Policies and Procedures.  Authority to issue debt must be obtained in accordance with current Oklahoma State Statutes.  Statutes governing the issuance of new general revenue pledge debt provide for a legislative review of requests, but allow an exception from this review process for refunding or defeasance obligations.  The Board will approve seeking the required approvals of the Council of Bond Oversight, the Oklahoma State Regents for Higher Education, and the Oklahoma Attorney General in a timely manner to ensure that funding for projects is available when needed.  Additionally, the Board will ensure all required legal opinions necessary to comply with applicable Oklahoma and federal laws, as well as any other opinions appropriate for the proposed financing are obtained.

4.0  Institutional Guidelines
Debt must be issued in strict compliance with applicable law.  The following guidelines will apply:

4.1    Project Selection: The appropriate executive officers for the Institutions must support the use of external financing of the project before seeking Board approval.  Capital projects are generally evaluated on a project by project basis by each Institution and prioritized through a Campus Master Plan and/or the OSRHE’s Capital Master Plan.  A project that has a related revenue stream or can create budgetary savings, and is supported by an achievable financial plan, will receive priority consideration.

4.2    Project Funding: The Board will borrow money, through the issuance of debt, to finance only those projects that have been approved for financing by the Board.  Funds will be borrowed only after the specific project and/or the financing plan have been approved by the Board.  Each project requiring debt financing must be supported by an achievable financial plan that includes servicing the debt, meeting any new or increased operating costs, and maintaining coverage of project debt service.

4.3    Economies of Scale: Debt financings will be coordinated to the extent practical so that multiple project needs can be accommodated by a single borrowing, thereby increasing the efficiency of the transaction.  Since some issuance costs do not vary with the size of a borrowing, a larger bond issue increases the efficiency of the financing by spreading fixed costs over a greater number of projects or larger principal amount of bonds.

4.4    Timing of Borrowing:The timing of any borrowing should be coordinated to coincide as closely as possible to the cash flow requirements for construction of the project and to the meet the spend down requirements established by applicable statutory and/or regulatory requirements, therefore minimizing potential arbitrage rebate.

4.5    Reimbursement Resolution: Pursuant to applicable statutory and/or regulatory requirements, a reimbursement resolution (declaration of official intent) must be approved by the Board if, prior to a tax-exempt bond issue being sold, the Institution intends to spend funds from another source with the intent to reimburse the expenditures with tax-exempt bond proceeds.  The reimbursement resolution must be approved not later than 60 days after payment of the original expenditure.  Currently, the reimbursement allocation from bond proceeds must be made not later than 18 months after the later of: (i) the date the original expenditure is paid, or (ii) the date the project is placed in service, but in no event more than 3 years after the original expenditure.  Currently, certain preliminary “soft costs” expenditures (architectural, engineering, surveying, soil testing, etc) may be recovered without a reimbursement resolution up to an amount not in excess of 20% of the bond issue.

4.6    Service Providers: The Board will approve the selection of the financing team service providers such as, financial advisor, bond counsel, underwriters (if a negotiated sale), trustee bank, and others that may be necessary depending upon the type of financing contemplated, in accordance with Board policy.  Variable rate obligations may require service providers such as liquidity facility providers, remarketing agents, a letter of credit facility, or other type of credit enhancement.  Service providers must be selected through a request for proposal (RFP) process, as provided in 62 O.S. 695.7 and applicable rules of the Office of the State Bond Advisor.  All fees and expenses paid to such firms are subject to the approval of the Oklahoma State Bond Advisor.

4.7    Competitive or Negotiated Sale: The Institutions and Board will generally rely upon the advice of its financial advisor and/or the Oklahoma State Bond Advisor in determining whether the sale of bonds will be conducted via a competitive or negotiated sale.  Negotiated sales should be considered when the complexity of the bond issue requires specialized expertise or extensive financial modeling; when a negotiated sale would result in substantial savings in time or money due to interest rate sensitivity; when market conditions are unusually volatile or uncertain; or, in the case of refunding bonds.

A decision regarding method of sale should occur early in the bond issue development process in order to, in the event of a negotiated sale, engage an underwriting syndicate with sufficient lead time to participate in the financing structure development, document review and preparation, marketing, and other aspects of the transaction.  Any variable rate obligations will be sold via negotiated sale.  The Oklahoma State Bond Advisor must approve the final pricing of all debt regardless of the method of sale.

4.8    Amortization Period: The amortization period of the debt will be based on the type of asset financed, the expected availability of cash flow to meet debt service requirements, and the desired debt service coverage.  The amortization of debt may not exceed the useful life of the asset being financed.  The maximum amortization may not exceed any limit established by Oklahoma State Statutes.

4.9    Fixed versus Variable Rate Allocation: Variable rate debt can potentially provide a lower cost of capital, but introduces additional risks.  These risks include interest rate risk, tax risk, and liquidity risk.  To limit these risks, the Board will examine each Institution’s variable-rate exposure and consider: (i) the ratio of fixed to variable-rate debt for each pledged revenue; (ii) the ability of the Institution to maintain strong debt service coverage given the inherent volatility of variable-rate debt; and (iii) the level of unrestricted funds available for investment to compensate for fluctuations in variable-rate debt service requirements.

Variable rate exposure may be achieved directly, through the issuance of variable-rate obligations, or indirectly by entering into a fixed-to-floating interest rate swap contract at the time of, or on some date after, the issuance of debt.  Variable-rate obligations that are swapped to synthetic fixed-rate shall be treated as variable-rate debt when the Board reviews each Institution’s debt portfolio.

4.10  Interest Rate Swaps and Other Derivative Products: The Board recognizes that interest rate swaps and derivative products have inherent risks and are complicated financial products.  In the event an Institution desires to pursue an interest rate swap or derivative product, a swap advisor will be retained by the Institution, with Board approval, to assist it with the development of swap policies, requests for proposals, bid evaluation, and on-going swap management services.  The Institution may request Board approval of interest rate swaps and other interest rate risk management tools only after careful evaluation of the risks and benefits of any proposed transaction.  This evaluation will be provided by a Board-approved swap advisor.  The use of swaps or other derivative products must be tied directly to an Institution’s debt obligations.  The Institution shall not enter into swap or other derivative transactions for speculative purposes.  Swap agreements recommended to the Board shall contain terms and conditions as set forth in the International Swaps and Derivatives Association, Inc. (ISDA) Master Agreement.  All counterparties and derivative contracts must be approved by the Board before execution.

4.11  Taxable Debt: Institutions may recommend the use of taxable debt for those projects that have an intended use or other characteristics that preclude the use of tax-exempt debt, or in other instances where the use of taxable debt can be shown to offer a financial advantage to the Institution.  Any use of taxable debt requires Board approval and is subject to applicable statutory and/or regulatory requirements.

4.12  Debt Service Reserve/ DSR Surety Bond: In the event a debt service reserve fund is required, a cost benefit analysis will be prepared by the financial advisor and/or underwriter retained by the Institution (and approved by the Board) to determine whether purchasing a debt service reserve surety bond in lieu of a cash funded debt service reserve is cost effective.  The evaluation of the use of a debt service reserve surety bond shall consider the risk of such surety failing to satisfy the requirements of the financing documents in the future and the implications of such failure to the Institution(s).  Quotes will be obtained from qualified providers of this product and, if such quotes are determined to be beneficial to the Institution, the lowest and best quote will be selected.  The premium charged for the debt service reserve surety bond policy is subject to the approval of the Oklahoma State Bond Advisor.

4.13  Credit Rating: Other than for obligations issued through the OSRHE Master Lease Program, Institutions, on behalf of the Board, will generally seek credit ratings from one or more nationally recognized credit rating agencies for each issuance of debt.  The credit rating agencies generally conduct site visits or conference calls with appropriate administrators to gather information and perform statistical analyses in developing the credit rating.  Institutions, with assistance from their financial advisors, the Oklahoma State Bond Advisor, and/or underwriters, will create comprehensive credit rating materials to be distributed to the appropriate credit rating agencies in support of their rating request(s).  A high credit rating generally results in reduced borrowing costs through achievement of a lower interest rate.

4.14  Credit Enhancement: In consultation with the Oklahoma State Bond Advisor, a cost benefit analysis will be prepared by the financial advisor and/or underwriter retained by the Institution (and approved by the Board) to determine whether credit enhancement is cost effective for any debt issuance.  The evaluation of the use of credit enhancement shall consider the risk retained by the Institution against the risk to the provider of the credit enhancement.  Quotes will be obtained from major credit enhancement providers and, if the proposed credit enhancement is determined to be beneficial to the Institution, the lowest and best quote will be selected.  Institutions will consult with the Oklahoma State Bond Advisor to identify and evaluate potential credit enhancements, as provided in Oklahoma Statutes (currently 62 O.S. 695.7).  The fees and expenses paid to such firms for credit enhancement are subject to the approval of the Oklahoma State Bond Advisor.

4.15  Refunding Opportunities: When it can be demonstrated that a refunding is in the best financial interest of an Institution, the Board will consider the refinancing of outstanding debt for any of the three following reasons: (i) to remove or modify covenants in existing documents; (ii) to restructure debt; or (iii) to achieve a cost savings.  Institutions will monitor their outstanding debt portfolios and actively pursue advance or current refundings to achieve a debt service savings.  In the case of savings refundings, the Board will expect such transactions to produce at least a 3.0% net present value savings and to have a final maturity date no later than the final maturity date of the obligations being refunded.  Savings refundings of less than 3.0% may be considered under special circumstances.

Because U.S. Treasury, Internal Revenue Service (“IRS”) Regulations impose limits on the number of advance refundings that can be undertaken, the Board will weigh the anticipated benefits of any proposed advance refunding transaction against potential future constraints.

4.16  Defeasance: Institutions will actively monitor opportunities to efficiently defease outstanding debt prior to final maturity.  This is expected to occur most frequently when excess pledged funds are available to retire debt, or when debt service reserves exceed the outstanding principal balance.  Board approval will be requested prior to any defeasance.

4.17  Debt Service Coverage and Debt Burden: Before approving the issuance of new debt, the Board will consider the impact such issuance will have on an Institution’s debt burden and its ability to provide debt service coverage.  In the case of obligations issued as self-liquidating debt (70 O.S. 4001 et seq.), Institutions must demonstrate that the proposed new issuance will: (i) be in compliance with any applicable additional bonds tests and other requirements of existing documents; or (ii) provide for sufficient security provisions in new documents to ensure that the debt will obtain favorable ratings and strong market acceptance.

In the case of debt issued under the general revenue pledge authority (70 O.S. 3980.1 et seq.), each financing is expected to be supported by a discrete and separate source of revenue that, according to the project financial plan, will be sufficient to provide for the payment of annual debt service requirements.  Each year, and at the time of any debt issuance, Institutions will calculate debt service ratios and the overall debt burden for all obligations issued under the general revenue pledge authority.  The Board recognizes that rating agencies and other credit analysts use these and other measures in evaluating an issuer’s ability to issue and repay debt.  An Institution may elect to monitor other selected ratios (including, but not limited to those suggested by the rating agencies) to provide further information regarding its financial performance.

4.18  Arbitrage Rebate: As a condition of its approval, the Board requires that Institutions commit to full compliance with the arbitrage regulations of the IRS.  To monitor compliance with these regulations, Institutions shall: (i) ensure that debt proceeds are maintained in separate funds and accounts, as designated in the legal documents associated with each transaction; (ii) maintain a record-keeping system that will track the expenditure of such proceeds and any income derived from the investment of such proceeds; and (iii) provide such regular reports as may be needed in a timely manner. 

Institutions shall contract with qualified professionals to perform required arbitrage rebate analysis and calculations to ensure compliance with IRS Regulations.  Arbitrage compliance consultants should be selected competitively, with requests for proposals for such services sent to a list of qualified providers and selection made according to the lowest and best bid.  Fees for arbitrage compliance consultants will be paid by the Institution holding the bonded indebtedness.

4.19  Reporting Requirements: The Audited Annual Financial Statements (“Statements”), prepared by each Institution and presented to the Board annually, will provide detailed information related to all outstanding bond, note, and capital lease indebtedness (including all obligations under the OSRHE Master Lease Program).  The Statements will provide information regarding outstanding bonds, notes, and capital leases, such as identification of obligation, par amount outstanding, maturity dates, and changes in outstanding indebtedness.

4.20  Continuing Disclosure/Post-Sale Compliance: Institutions will provide updated financial information and operating data and timely notice of specified material events in a manner consistent with industry standards, and the requirements of the Securities and Exchange Commission Rules (e.g. SEC Rule 15c2-12).  Institutions will also monitor applicable post-sale developments to ensure compliance with their continuing disclosure undertakings.

5.0  Oklahoma State Regents for Higher Education (OSRHE) Master Lease Programs

The OSRHE currently operates two Master Lease programs under Oklahoma Statutes: one for the acquisition of Personal Property (authorized by 70 O.S. 3206.6) and one for the acquisition of Real Property (authorized by 70 O.S. 3206.6a).  The Board may utilize the OSRHE Master Lease Programs (Master Lease) when it is determined that the use of such programs is more cost-effective or efficient than a direct Institution borrowing.  Advantages to using these programs include: cost saving efficiencies achieved through the allocation of issuance costs across multiple participants in a given financing; a debt service coverage ratio is not required due to appropriation of funds by the State; service providers are selected via RFP by the Oklahoma Development Finance Authority; and, a generally shorter time frame for issuance.  The Board must approve any items proposed to be financed by the Master Lease Programs.

6.0  Alternative/Innovative Financing Activity

The Board may consider alternative or innovative financing structures at the request of an Institution, such as third-party transactions in which the Institution is a contractual participant.  However, because such financings can often involve significant risk, Institutions are encouraged to consult with the Oklahoma State Bond Advisor and seek her/his written input concerning the proposed transaction.

Approved Date: 
April 17, 2009