Talking Stick - July/August 2011 - 33

recourse only to the revenues of the speciﬁc project they ﬁnance. This descending order in the breadth of pledged revenue sources is reﬂected in investors’ assessment of risk associated with a debt issue and the interest rate that will be demanded to assume that risk. The depth of the pledged revenue stream is also a primary consideration. Rating agencies and lenders look for projections of expected income that are based on realistic assumptions about occupancy of the project(s) to be ﬁnanced and the campus housing system overall. They want similarly realistic projections of expenditures that will exercise claims on that income. A bond issue’s credit rating is a third factor with strong inﬂuence on an investor’s reckoning of risk and reward – and hence on borrowing costs. Not all bond issues are rated, but many are: some individually and others by an underlying rating that applies to all debt owed by an institution. One or more agencies – the best known are Standard & Poor’s, Moody’s, and Fitch – develop the ratings based on ﬁnancial data speciﬁc to a proposed debt issue and, more broadly, the borrowing

Revenue is the ﬁrst quantity that must be considered in determining debt capacity. In projecting revenue, it is advisable to distinguish between anomalies in the income stream and operating revenues that are recurring and reasonably predictable.
institution’s overall ﬁnancial condition. Ratings are meant to be an indicator of credit quality and can range from “extremely strong capacity to meet

ﬁnancial commitments” to “highly vulnerable to nonpayment.” Generally, bonds rated in the top half of the rating scales are considered investment-grade. Many institutional investors buy only investment-grade bonds or ones that are considered to have equivalent creditworthiness. Consequently, the market is more competitive and interest rates more favorable for bonds with investmentgrade ratings.

Debt Capacity
Attention thus far has been focused on structural and cost aspects of debt ﬁnancing. There remains for discussion the matter of debt capacity, which is the amount of debt that a borrower can assume or, more precisely, the maximum amount that is considered prudent for a borrower to assume at a given time. Investors, lenders, and rating agencies measure debt capacity based on the sufﬁciency, availability, and reliability of the pledged revenue stream to fund the claims that will be made upon it. Revenue is the ﬁrst quantity that must be considered in determining

3 Be data-centered. Inform your aspirations, recommendations, and decisions with facts and ﬁgures about your resident population, your institution’s enrollment management plan, your competition, your existing facilities, and the kinds of new or renovated facilities that are most needed.

4 Be prepared, proactive, and politic in contacts with stakeholders who play a role in determining whether more and better campus housing is needed and whether debt can and should be assumed to ﬁnance it. It is normal for their objectives, strategies, and tactics to differ.

5 Expect that moving from the conception of a project through its authorization, design, construction, and ﬁnancing will take more time than it should. Reasons why vary, but that is the usual outcome.

JULY + AUGUST 2011

Talking Stick - July/August 2011

Table of Contents for the Digital Edition of Talking Stick - July/August 2011