Trendspotting: What’s trending in higher
education finance?
Presenter:
Walter Goldsmith
What does a Financial Advisor do?
Typical financial advisor services:

Below is a partial listing of the financial advisory services typically provided:
• Debt Capacity Analysis
• Debt Structuring
• Cash Flow Analysis
• Revenue Impact Analysis
• Debt Refunding Analysis
• Investment of Bond
Proceeds
• Capital Improvement
Planning
• Pro Forma Modeling
• Fiscal Policy Guidelines
• Peer Comparative Analysis • Credit Strategy
• Public/Private
Partnerships
• Historical Trend Analysis
• Cost Benefit and Risk
Analysis
• Debt Transaction
Implementation
1
Overview of First Tryon Advisors
Overview of First Tryon Securities, LLC
Municipal Sales & Trading Desk
 Founded eighteen years ago and headquartered in
 The financial advisory team at First Tryon has access
Charlotte, North Carolina, First Tryon Securities, LLC is
a regionally focused independent, privately owned
securities firm.
to real-time market information for tax exempt and
taxable securities through our trading platform.
 Our desk assists our clients when pricing bonds in the
 The firm operates a full service financial advisory
public markets – ensuring the proposed spreads
provide the best deal for the client.
practice serving the needs of colleges/universities,
cities, towns, counties, utilities and not-for-for profits
in the southeast region.
 First Tryon’s total trade volume for 2014 exceeded $4
billion in par amount.
 The firm is registered with both the Municipal
Office Locations
Securities and Rulemaking Board and the Securities
and Exchange Commission. First Tryon employs 24
registered representatives with an average of 18
years’ experience.
 The firm has offices in Charlotte (NC), Atlanta (GA),
Gulf Breeze (FL) and Jacksonville (FL).
 The bankers at First Tryon Advisors are all located in
First Tryon Advisors
the firm’s Charlotte, NC headquarters.
 First Tryon Advisors (“FTA”) is a business of First Tryon
Securities, LLC and operates as the Financial Advisory
arm of the Firm.
 First Tryon does not serve as an underwriter and only
provides financial advisory services to our clients.
2
Higher Education Experience in the Carolinas

The bankers at First Tryon have significant experience working with Higher Education institutions,
both public and private throughout the Carolinas.
 Transaction in Progress
South Carolina
 Anderson University
 Converse College2
 Furman University
 Southern Wesleyan University
 Wofford College2
 Clemson University
 Presbyterian College
 USC Upstate
Private College/University
Public College/University
(1) Swap Advisory Engagement
(2) Underwriter Engagement of Tripp Robinson
3
North Carolina
 Appalachian State University
 Davidson College
 East Carolina University
 Elizabeth State University
 Fayetteville State University
 Guilford College1
 Lenoir-Rhyne University
 Mars Hill University2
 Meredith College2
 Methodist University
 NC Central University
 NC State University2
 North Carolina A&T
 Queens University of Charlotte
 UNC Asheville
 UNC Chapel Hill2
 UNC Charlotte2
 UNC Greensboro
 UNC Pembroke
 UNC Wilmington
 Western Carolina University
 Winston Salem State University2
Topics for Discussion
I.
Interest Rate Environment
- The trends that influence interest rate environment
II.
Debt Capacity and Debt Affordability
III.
Rating Agencies
4
Market Update
Municipal Market Update
30/10 Year MMD Since 1/1/2014
4.500%
4.19%
May 19, 2015
4.000%
3.500%
3.28%
2.77%
3.000%
2.500%
2.30%
2.000%
10 Year
30 Year
7.000%



Long-term tax-exempt rates fell 169 basis points from
January 1, 2014 to a low of 2.50% on January 31,
2015.
May-1
Apr-1
Mar-1
Feb-1
Jan-1
Dec-1
Nov-1
Oct-1
Sep-1
Aug-1
Jul-1
Jun-1
May-1
Apr-1
Mar-1
Feb-1
Jan-1
1.500%
Index
Low
High
Avg.
10 Year 1.47% 5.90% 3.66%
30 Year 2.47% 6.55% 4.57%
30/10 Year MMD (20 year history)
6.000%
5.000%
Benchmark rates hit their 2015 highs in early May and
still continue to rise.
4.000%
3.000%
The chart to the right shows the 20 year history of the
10 and 30 year MMD indices; rates today are near
historic lows.
2.000%
1.000%
10 Year MMD
Source: Thompson Reuters, as of May 19, 2015
6
30 Year MMD
1-Jan-15
1-Jan-14
2-Jan-13
1-Jan-12
1-Jan-11
1-Jan-10
1-Jan-09
1-Jan-08
1-Jan-07
1-Jan-06
1-Jan-05
1-Jan-04
1-Jan-03
1-Jan-02
1-Jan-01
1-Jan-00
1-Jan-99
1-Jan-98
1-Jan-97
1-Jan-95
1-Nov-95
0.000%
Interest Rate Projections
30 Year US Treasury Projections
4.30%
4.10%
3.90%
3.70%
3.50%
3.30%
3.10%
2.90%
2.70%
2.50%
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Fed Funds Rate Projections
2.00%
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
Q2 2015
Q3 2016
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Median Survey
BAML
Wells Fargo
Median Survey
BAML
Wells Fargo
RBC
Credit Suisse
Ray. Jay.
RBC
Credit Suisse
Ray. Jay.
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Median
Survey
2.80%
2.93%
3.10%
3.25%
3.39%
3.47%
BAML
2.85%
2.90%
3.00%
3.10%
Wells
Fargo
2.77%
2.89%
2.99%
3.09%
3.18%
3.39%
RBC
2.70%
3.00%
3.35%
3.50%
3.70%
4.15%
Credit
Suisse
2.74%
2.90%
2.95%
3.00%
3.05%
3.05%
Ray.
Jay.
2.94%
3.04%
3.15%
3.23%
3.30%
3.34%
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Source: Bloomberg
7
Median
Survey
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
BAML
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
Wells
Fargo
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
RBC
0.25%
0.50%
0.75%
1.00%
1.25%
1.75%
Credit
Suisse
0.25%
0.50%
0.75%
1.00%
1.25%
1.75%
Q3 2016
Ray.
Jay.
0.25%
0.50%
0.50%
0.75%
1.00%
1.25%
Capital markets movement over the past month
Market Highlights

Employers added 223,000 jobs in April (matching consensus estimate) and revised March’s employment numbers down to just
85,000.

The Fed has not ruled out an interest rate increase in June, but it looks increasingly unlikely, given softer economic releases since
the Fed’s last policy meeting (i.e. retail sales).

GDP slowed to a 0.2% seasonally adjusted annual rate in the first quarter, down from the previous two quarters (2.2% in the fourth
quarter and 5% in the third quarter).

China cut interest rates for the third time in six months amid a worse-than-expected economic slowdown.

The US Dollar struggles as it experienced its worst month in four years due to weak earnings reports and lackluster economic
results.
Value ($)
2,140
Equities fluctuate over past month
S&P 500
Treasury yields move upward over past month
Daily Change (%)
10Y UST yield
5.00%
4.00%
2,120
3.00%
2,100
2.00%
2,080
1.00%
0.00%
2,060
-1.00%
2,040
-2.00%
-3.00%
2,020
-4.00%
2,000
15-Apr
Source: Bloomberg
22-Apr
30-Apr
Daily % Change
7-May
-5.00%
15-May
S&P 500
8
0
2006
2007
2008
2009
Annual Total
2010
2011
2012
2013
2014
2015
YTD
2.00%
Annual Average
Source: The Bond Buyer
MMD/UST
9
Source: Bloomberg/Thompson Reuters
30Y MMD
30Y UST
Inflows
-3.0
Outflows
-4.0
30Y MMD
5/16/2015
-2.0
3/16/2015
1/16/2015
11/16/2014
9/16/2014
7/16/2014
5/16/2014
3/16/2014
1/16/2014
11/16/2013
50
9/16/2013
100
7/16/2013
300
5/16/2013
350
3/16/2013
5.50%
1/16/2013
400
11/16/2012
Annual Municipal Bond Volume
9/16/2012
450
7/16/2012
-8.0
2.50%
-9.0
2.00%
5/15/2013
5/22/2013
5/29/2013
6/5/2013
6/12/2013
6/19/2013
6/26/2013
7/3/2013
7/10/2013
7/17/2013
7/24/2013
7/31/2013
8/7/2013
8/14/2013
8/21/2013
8/28/2013
9/4/2013
9/11/2013
9/18/2013
9/25/2013
10/2/2013
10/9/2013
10/16/2013
10/23/2013
10/30/2013
11/6/2013
11/13/2013
11/20/2013
11/27/2013
12/4/2013
12/11/2013
12/18/2013
12/25/2013
1/1/2014
1/8/2014
1/15/2014
1/22/2014
1/29/2014
2/5/2014
2/12/2014
2/19/2014
2/26/2014
3/5/2014
3/12/2014
3/19/2014
3/26/2014
4/2/2014
4/9/2014
4/16/2014
4/23/2014
4/30/2014
5/7/2014
5/14/2014
5/21/2014
5/28/2014
6/4/2014
6/11/2014
6/18/2014
6/25/2014
7/2/2014
7/9/2014
7/16/2014
7/23/2014
7/30/2014
8/6/2014
8/13/2014
8/20/2014
8/27/2014
9/3/2014
9/10/2014
9/17/2014
9/24/2014
10/1/2014
10/8/2014
10/15/2014
10/22/2014
10/29/2014
11/5/2014
11/12/2014
11/19/2014
11/26/2014
12/3/2014
12/10/2014
12/17/2014
12/24/2014
12/31/2014
1/7/2015
1/14/2015
1/21/2015
1/28/2015
2/4/2015
2/11/2015
2/18/2015
2/25/2015
3/4/2015
3/11/2015
3/18/2015
3/25/2015
4/1/2015
4/8/2015
4/15/2015
4/22/2015
4/29/2015
5/6/2015
Billions
2.0
5/16/2012
Billions
Municipal Market Snapshot
Municipal Bond Fund Flows
6.50%
1.0
6.00%
0.0
-1.0
5.50%
5.00%
4.50%
4.00%
-5.0
-6.0
3.50%
-7.0
3.00%
Source: Bloomberg
Tax-Exempt/Taxable Ratios
140%
5.00%
130%
4.50%
120%
110%
250
4.00%
100%
200
3.50%
80%
150
3.00%
70%
90%
2.50%
60%
50%
40%
Debt Capacity
Overview of Debt Capacity & Debt Affordability
Debt Capacity :
Refers to an institution’s ability to absorb additional debt onto the balance sheet.
This is quantified by evaluating key metrics and the impact of the proposed debt.
Debt Affordability :
Refers to an institution’s ability to manage the cost of the proposed debt.
11
NC House Budget Bill
DEBT AFFORDABILITY STUDY FOR THE UNIVERSITY OF NORTH CAROLINA
SECTION 31.13. Chapter 116D of the General Statutes is amended by adding a new Article to read:
Article 5. "Managing Debt Capacity. “
§ 116D-55. Purpose. The purpose of this Article is to provide tools for sound debt management at The University of
North Carolina by requiring each constituent institution to conduct an annual debt affordability study, by requiring
the establishment of guidelines for maintaining prudent debt levels, and by establishing a system for prioritizing
University capital needs when the needs exceed the University's capacity for new debt.
"§ 116D-56. Debt affordability study required.
(a) Study Required. – The Board of Governors shall annually advise the Governor and the General Assembly on the
estimated debt capacity of The University of North Carolina for the upcoming five fiscal years. The Board shall
oversee the undertaking of an annual debt affordability study and the establishment of guidelines for evaluating the
University's debt burden. The guidelines should include target and ceiling ratios of debt to obligated resources 26
and target and floor percentages for the five-year payout ratio. The Board shall also recommend any other debt
management policies it considers desirable and consistent with sound management of the University's debt.
(b) Board of Governors Reporting Required. – The Board shall report its findings and recommendations to the Office
of State Budget and Management, the Joint Legislative Commission on Governmental Operations, the State
Treasurer, and The University of North Carolina General Administration by February 1 of each year. The report shall
be accompanied by each of the reports provided to the Board pursuant to subsection (c) of this section.
12
NC House Budget Bill
DEBT AFFORDABILITY STUDY FOR THE UNIVERSITY OF NORTH CAROLINA
(c) Constituent Institution Reporting Required. – No later than November 1 of each year, each constituent institution
shall report to the Board of Governors on its current and anticipated debt levels. The report shall be made in a
uniform format to be prescribed by the Board of Governors. Each report shall include at least the following:
(1) The amount and type of outstanding debt of the institution.
(2) The sources of repayment of the debt.
(3) The amount of debt that the institution plans to issue or incur during the next five years.
(4) A description of projects financed with the debt.
(5) The current bond rating of the institution and information about any changes to that bond rating since the
last report was submitted.
(6) Information about the constituent institution's debt management policies and any recommendations for
methods to maintain or improve the University's bond rating.
(7) Debt burden comparisons to comparable peer institutions.
(8) Any other information requested by the Board of Governors.
13
Ratio example of Debt Capacity & Debt Affordability
Expendable Financial Resources to Debt
Measures coverage of debt by financial reserves or funds a university can access in the intermediate term
due to temporary spending restrictions, largely donor or sponsor imposed.
Debt to Operating Revenues
Measures coverage of debt from annual operating revenue.
Debt Service to Operations
Measures the scale of an institution’s annual debt service requirements as it related to Operations.
14
Example of Debt Capacity Analysis
15
Example of Debt Capacity Analysis
16
Example of Debt Capacity Analysis
17
Example of Debt Capacity Analysis
18
Example of Debt Capacity Analysis
19
Example of Debt Capacity Analysis
20
Example of Debt Capacity Analysis
21
Rating Agencies
What is a credit rating?
Measure of ability to repay debt or financial
obligations
Moody’s
S&P
Fitch
Assists investors in evaluating the credit
worthiness of an institution (like a personal credit
score)
Aaa
AAA
AAA
Aa1
AA+
AA+
•
Evaluates quantitative and qualitative
characteristics of an institution
Aa2
AA
AA
Aa3
AA-
AA-
•
Letter grid rating with numerical (1,2,3) or
plus/minus differentiators
A1
A+
A+
A2
A
A
A3
A-
A-
Baa1
BBB+
BBB+
Baa2
BBB
BBB
Baa3
BBB-
BBB-
•
Non Investment Grade
23
Factors considered by the Rating Agencies

Below are the factors considered by the Rating Agencies when evaluating institutions:
Market Position
Operating Performance
 Ability to compete effectively for
tuition revenue, private gifts,
research grants, and
government support.
 Ability to repay debt from fiscal
operations while providing
funds for strategic investment
in programs and facilities.
Governance and
Management
Legal Security and Debt
Structure
 Ability to enable an
organization to reach its full
potential while avoiding
financial stress.
 Ability to maintain healthy
levels of debt and to
appropriately manage potential
risks associated with particular
financing vehicles.
24
Balance Sheet and Capital
Investment
 Ability to provide continual
financial support for the
mission and to support longterm capital and financial
planning horizons.
External Factors
 Ability to overcome cuts in state
and federal support, adverse
economic conditions and other
potential external risks.
Importance of Peer Comparisons

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Peer comparisons are a valuable tool used by the rating agencies during the rating process:
Current Senior Most Rating*
Expendable financial resources-to-operations (x)
Total Financial Resources-to-Operations (x)
Expendable financial resources-to-direct debt (x)
Total cash & investments-to-direct debt (x)
Debt service to operations (%)
Total Direct Debt ($, in millions)
Expendable Financial Resources ($, in millions)
Total Financial Resources ($, in millions)
Total Cash & Investments ($, in millions)
Total Revenues ($, in millions)
Total Enrollment FTE (#, may be estimated)
Primary Selectivity (%)
Primary Matriculation (%)
Net tuition per student ($)
Operating margin (%)
Debt Service Coverage (x)
Tuition & Auxiliaries (%, of Total Revenue)
Available Funds ($, in millions)
Available Funds to Debt
UN C
W ilm ington
2013
A1
0.34
0.60
0.40
0.70
6.39
237
88
156.63
174
269
13,110
52.0
31.5
6,978
3.1
2.0
49.8
152.8
0.64
25
Appalachian
State
University
2013
Aa3
0.38
0.59
0.50
0.40
7.41
275
125
196.82
111
342
17,100
65.8
32.1
6,065
3.0
1.6
47.9
160.4
0.58
UN C
UN C
Asheville
Greensboro
2013
2013
A1
Aa3
0.37
0.57
0.65
0.93
0.60
0.70
0.70
1.40
4.93
4.31
48
264
30
194
52.3
316.7
34
360
79
362
3,358
15,891
68.7
58.0
27.3
42.3
6,867
5,213
(1.6)
5.8
1.5
3.0
41.9
34.4
36.5
148.7
0.91
0.56
W estern
C arolina
University
2013
Aa3
0.47
0.67
0.80
1.10
5.01
113
87
123.08
126
192
9,037
38.8
27.4
5,673
4.5
2.4
42.8
93.0
0.82
Ratio Definitions
Key Financial Ratios

Direct Debt ($)
– Measures direct obligations of institution.
– Institutions obligations (e.g. bonds, notes, commercial paper, capital lease, bank loans, and draws upon lines of credit)

Unrestricted Financial Resources ($)
– Amount of most liquid financial resources.
– Total unrestricted net assets less net investment in plant

Expendable Financial Resources ($)
– Measure of financial resources that are ultimately expendable.
– Total unrestricted and temporarily restricted net assets less net investment in plant

Total Financial Resources ($)
– Measures total financial wealth of institution.
– Total net assets less net investment in plant

Total Cash & Investments
– Measure base of assets that generate investment return.
– Total cash and investments
26
Ratio Definitions
Capital Ratios

Unrestricted Financial Resources-to-Direct Debt (x)
– Measures coverage of direct debt by the most liquid financial resources.
– Unrestricted financial resources divided by direct debt

Expendable Financial Resources-to-Direct Debt (x)
– Measures coverage of direct debt by financial resources that are ultimately expendable.
– Expendable financial resources divided by direct debt

Total Financial Resources-to-Direct Debt (x)
– Measures coverage of direct debt by total financial resources including permanent endowments.
– Total financial resources divided by direct debt

Total Cash & Investments-to-Direct Debt (x)
– Measures coverage of direct debt by assets that generate investment return.
– Total cash and investments divided by direct debt

Debt Service to Operations (%)
– Measures burden of actual debt service payments relative to overall operating budget.
– Actual annual debt service divided by total operating expenses
 Variable Rate Exposure (%)
– Measures the portion of direct debt issued in variable rate mode.
– Sum of par amount of debt outstanding under all series of bonds and other debt issued as variable rate securities, divided by
direct debt. (variable rate bonds synthetically swapped to a fixed rate are included in variable rate debt)
27
Ratio Definitions
Balance Sheet Ratios

Unrestricted Financial Resources-to-Operations (x)
– Measures coverage of annual operations by the most liquid financial resources.
– Unrestricted financial resources divided by total operating expenses

Expendable Financial Resources-to-Operations (x)
– Measures coverage of annual operating expenses by financial resources that are ultimately expendable.
– Expendable financial resources divided by total operating expenses

Total Financial Resources-to-Operations (x)
– Measures coverage of annual operations by the total financial resources.
– Total financial resources divided by total operating expenses
Operating Ratios

Operating Margin (%)
– Indicates the excess margin (or deficit) by which annual revenues cover operating expenses.
– Adjusted total unrestricted revenues (adjustments include limiting investment income to 5% of average of previous three years
cash and investments and subtracting net assets released for construction and acquisition of fixed assets), less total
unrestricted operating expenses, divided by adjusted total unrestricted revenues

Direct Debt Service Coverage (x)
– Measures actual margin of protection for annual debt service payments from annual operations.
– Annual operating surplus (deficit) plus interest and depreciation expenses, divided by actual principal and interest payments
28
Types of Borrowings Available
Most common types of borrowings:
Publicly sold bond issues

With official statement / credit ratings

Fixed rate or variable rate

If variable rate, most are backed by a Direct Pay Letter of Credit
Bank placed loans (also known as “Direct Purchase”)

Can be either fixed rate or variable rate

Banks have strong appetite for shorter amortization

Banks typically want to include more covenants
30
Questions/Answers
Trendspotting: What’s trending in higher
education finance?
Presenter:
Walter Goldsmith