F–4 STANDING COMMITTEES Finance and Asset Management Committee

F–4/206-20 6/11/20

Overview of Institutional Liquidity and Debt Capacity INFORMATION This item is for information only. BACKGROUND The Board regularly receives reports on the University’s debt capacity and liquidity. Last month’s annual debt report focused on external borrowing and internal lending: https://s3-us-west-2.amazonaws.com/uw-s3-cdn/wp-content/uploads/sites/12/2020/04/01154319/2020-04-F-4.pdf. This month’s Item No. F–1 reports the status of the University’s external debt portfolio. In this item, Brian McCartan, Vice President, Finance, will describe COVID-19 impacts on the University’s debt capacity and institutional liquidity on the basis of the attached slides. Attachment University of Washington Debt Capacity and Liquidity Overview

UNIVERSITY OF WASHINGTONDebt Capacity and Liquidity Overview

Board of Regents Finance and Asset Management Committee

June 11, 2020

ATTACHMENT (revised)F-4.1/206-20 6/11/20

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UPDATES AND ACTIONS

1. Debt Capacity Update

2. Liquidity

– Update/Status

– Action: Proposed $200m Line of Credit

– FAST Program

> Action: Up to $19m Oak Hall FAST Loan

> Action: 3 Year Extension of FAST Program at $40m

3. Internal Lending Program (ILP)

– Update/Status

– Action: Waiver of Requirement for Financial Stability Plans

– Action: Interdisciplinary Engineering Building Loan

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Debt Capacity Update

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DEBT CAPACITY ESTIMATES

> Treasury updates debt capacity annually using 5-year financial forecast, selected financial ratios and peer analysis

> May 2020 update estimates the five-year debt capacity at $475 million, targeting a a Moody’s Aa1 rating.

> Covid forecast reduced capacity, assumed lower rating increased it, net impact is $25m lower than last years estimate

> 5-Year Capital Plan (June Regent Action) has been realigned with the lower capacity

> 15-Year Capital Plan was based on higher capacity and will need to be adjusted

4

(1) Reflects debt capacity allocated to Board approved projects. Authorized projects include Destination One, Finance Transformation, Health Science Education Building, NWH Childbirth Center, and Kincaid Hall.

(2) Actual annual issuance may vary depending on capital spending and financing plan.(3) Board approved projects are also funded from prior year bond issuances and include bond premium totals may not foot to semi-annual debt

report future debt needs for the same projects.

Projected Debt Balances FY21 - FY25

(in millions)

Beginning Balance Debt RetiredBoard Approved Projects (1) (2) (3)

Estimated Incremental Capacity

Ending Balance

FY21 2,367 -90 95 0 2,372

FY22 2,372 -93 95 0 2,373

FY23 2,373 -93 95 0 2,375

FY24 2,375 -96 8 87 2,374

FY25 2,374 -97 0 95 2,372

Totals -470 293 182

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DEBT HISTORY AND FUTURE

Ramp-Up (FY09 – FY13)

CAGR: 17%

Slow-Down (FY14 - FY18)

Sustainable (FY19 – FY25)

CAGR: 4.6% CAGR: -0.70%

Lower construction costsLow interest rates

Low relative debt levels

Strategy: Borrow to principal repaid (1)

5

($ in millions)

Higher construction costsLow interest rates

Projected capacity constraints

(1) Actual annual issuance may vary depending on capital spending and financing plan

87 95102 95 95 95

8

$1,018

$1,893

$2,474 $2,372

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 $-

$50

$100

$150

$200Board Approved Projects

Estimated Remaining Capacity

Outstanding Debt

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Liquidity Overview

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INSTITUTIONAL LIQUIDITY

> Liquidity is generally defined as the availability of resources to meet cash needs for general expenditures within one year

> At FY2019, UW overall had 155 days cash on hand

– This figure is on the low end for highly rated public universities

– 2019 Aaa median is 181 days

– UWMC has 60 days cash and likely declining in coming months

– ICA and HFS also may require some liquidity support

> Two main forms of liquidity– UW cash/near-cash investments

> Invested Funds (IF) – largely dedicated to particular purposes and not entirely available to meet general liquidity requirements

– External borrowing facilities (e.g., commercial paper, lines of credit, short term lending program)

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SOURCES OF LIQUIDITY AND DEBTType Primary Use Notes

Short-Term Liquidity

Invested Funds(Short-term Pool)

Support daily operations Highly liquid. Convertible to cash within 3 days. Largely dedicated to specified uses.

Line of Credit Could support UWM or other units $200M proposedRequesting Board approval in June 2020

Medium Term Liquidity

Invested Funds(Intermediate-term Pool)

Support daily operations Liquid. Convertible to cash between 3-180 days. Largely dedicated to specified uses.

Commercial Paper Funding project cash flows between long-term debt issuance

$250M total availability, currently no outstanding commercial paperMay seek additional capacity with September 2020 financing resolution

Bridge Loan Program Align gift-funded project cash flows with philanthropy

$50M size with under $10M availableSubject to availability of funds within Treasury balances

Financing Assets in the Short Term (FAST)

Loans to support equipment and shorter-lived asset acquisition

$3.5M in outstanding loans at 3/31/2020 with $23m in pending loansRequesting renewal of program in June 2020

Long Term Liquidity

Invested Funds(Long-term Pool)

Meet longer term liabilities or generate positive return to support operations

Less liquid. Invested in Endowment (CEF)

Capital Assets Pool Finance construction and acquisition of long term assets, primarily buildings

$132M outstandingUse of institutional reserves as an alternative to external borrowing

General Revenue Bonds Finance construction and acquisition of long-term assets, primarily buildings.

$2.4 billion outstandingBacked by all non-appropriated local funds. Supports Internal Lending Program

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Internal Lending Program (ILP)Borrower Update

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INTERNAL LENDING PROGRAM

> The ILP is designed to:

– Provide a stable interest rate to campus borrowing units

– Manage the institutional risk of project-related debt

– Provide the Board and senior leadership with regular reports on campus borrowers to identify “early warning” of financial difficulties

– Create flexibility to help mitigate negative financial impacts to borrowers, while maintaining the financial sustainability of the ILP

> ILP has used this flexibility to:

– Restructure ICA debt service as part of a Financial Stability Plan

– Suspend covenants for the Clinical Enterprise as part of the FIT program

– Accelerate the implementation of a rate reduction (to May 2020 from July 2020) to provide immediate relief to all borrowers during the pandemic

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SIGNIFICANT COVID IMPACTS TO ILP BORROWERS

Most borrowers are projecting some level of financial distress

Housing and Food Services $709.8 Yes

Central $483.2 N/A N/A N/A

Clinical Enterpr ise (2) $391.9 FSP

Intercollegiate Athlet ics $239.0 FSP

Student Life $148.7 Yes

UW Tacoma $34.9 Yes

UW Bothell $11.0 Yes

School of Dentistry $9.7 N/A N/A

Total at 12/ 31/ 2019: $2,028

(2) Financial covenants were suspended through 6/30/20

(3) Only reflects outstanding debt within the ILP (e.g. excludes SLU)

(1) FSP indicates unit in Financial Stability Plan

ILP Borrowers

Department Loan Balance In Compliance (1)Trending as

of 12/ 31

Trending as

of 6/ 30

(3)

Out of compliance. Unit will miss one or more ILP

covenants

Pending. Unit may miss one or more ILP covenants

In compliance

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BORROWER SUPPORT

> Reduced ILP rate from 4.50% to 4.25% effective May 1st

– Additional mitigation steps under evaluation

> Lines of credit will provide access to short-term debt if needed

> CARES Act FICA deferment (~$130m) could provide short term support to affected units

> FAST loan to HFS will allow Oak Hall to be completed while preserving unit reserves

> Board action to waive Debt Policy requirements for FY20 and FY21 to allow for unit stabilization, while more closely monitoring performance

Treasury continues to work directly with effected borrowers

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