Debt Management Policy (B13)

SUBJECT:
Debt Management Policy

PURPOSE: The Debt Management Policy guides the Board of Trustees in approving new and reviewing existing debt levels. This policy also guides administrators in recommending and managing debt.

Overview

Graceland will manage resources prudently and will optimize financial opportunities to fulfill its educational mission and vision. In addition to sources of revenue, contingency reserves, endowment funds, and project funds, access to the financial markets is another financial resource to Graceland.

Accessing the financial markets through debt borrowings provides a tool for meeting strategic objectives. Debt borrowings may range from securing working capital for temporary needs to securing long-term financing for major capital projects. Issuing debt can reduce the cost of capital and can be an effective strategy for financing long-term assets. Issuing debt in lieu of spending endowment resources may result in endowment investment yields that exceed debt expenses. Guidelines

Graceland University:

optimizes financial opportunities to support its educational mission now and for future generations through the strategic application and management of resources including access to the financial markets through the issuance of tax-exempt debt.

uses financing techniques (short-term or long-term) appropriate to the use of the proceeds (working capital or fixed assets) and complies with all applicable tax regulations and useful life restrictions.

reviews various financing structures and strategies including variable rate and fixed rate and incorporates internal and external hedging techniques when appropriate as a means of reducing risks and creating opportunities associated with those financing structures.

strives to obtain and maintain an investment grade rating by managing debt pursuant to the covenants in existing debt documents and consistent with the benchmarks established in this policy.

issues secured or unsecured debt but will not pledge endowment or cash and securities as collateral.

utilizes tax-exempt debt as long as 1) the cost of incurring the debt is less than the prospective returns on Graceland's current or anticipated earning assets; 2) Graceland remains in compliance with covenants in existing debt documents, and 3) Graceland's ratios are consistent with the benchmarks established in this policy. Benchmarks

The three primary ratios used in managing debt are: 1) debt service coverage ratio, 2) liquidity ratio, and 3) debt as a percentage of debt capacity. Graceland will utilize these ratios as benchmarks in incurring and managing debt. Administrators will periodically (at least annually) review these ratios with the Board of Trustees. 1. Debt Service Coverage Ratio
An adequate debt service coverage ratio (similar to the Debt Coverage Ratio as defined by KPMG) is a prerequisite requirement for the credit market to consider extending additional debt to Graceland. Graceland’s goals are to manage debt 1) comparable to the benchmarks established by Moody's Investors Service for "Baa" or higher rated institutions and 2) for the debt service coverage ratio to consistently exceed 1.50. 2. Liquidity Ratio
The liquidity ratio (similar to the Viability Ratio as defined by KPMG) is a primary determinant of the amount that the credit markets are willing to lend to Graceland (i.e. total debt capacity). Graceland’s goals are to manage debt 1) comparable to the benchmarks established by Moody’s Investors Service for “Baa” or higher rated institutions and 2) for the liquidity ratio to consistently exceed 1.0. 3. Debt as a Percentage of Total Debt Capacity
Graceland’s long-term goal is to maintain debt at or below 67% of total debt capacity as determined by comparing Graceland’s liquidity ratio to the industry benchmark at the end of each fiscal year. Board authorization will be required annually for total debt to exceed 67% of total debt capacity.

INDEX: Debt Management Policy	Business 13 (B13)
Approved May 18, 2002
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