Managing Risk Around Capital Structure, Liquidity, and Mission
-
date post
19-Oct-2014 -
Category
Economy & Finance
-
view
446 -
download
2
description
Transcript of Managing Risk Around Capital Structure, Liquidity, and Mission
Managing Risk Around Capital Structure, Liquidity and Mission
Martha Bradley, Washington University in St. LouisJim Matteo, University of VirginiaCharlie Giffin, J.P. Morgan
2www.treasuryinstitute.orgwww.treasuryinstitute.org
Today’s panel
Charlie GiffinExecutive DirectorHead of Public Finance Debt Capital MarketsJ.P. Morgan
Jim MatteoAssistant Vice President for Treasury Operations and Fiscal PlanningUniversity of Virginia
Martha BradleyAssistant TreasurerWashington University in St. Louis
3www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
4www.treasuryinstitute.org
Managing risk in the new environment
Many institutions learned some tough lessons from the financial crisis
Several key risk factors came to light: Institutional exposure to fall in asset prices
Reliance on endowment for operating costs
Liquidity exposures in capital structure and investment activity
Swap MTM exposure in falling rate environment
Relationship of financial risks to implementation of the strategic plan
5www.treasuryinstitute.org
The risk management process is fairly established
Identify key risk areas Seek input across the institution
Quantify risks where possible Identify which risks could be considered “normal” vs. risks that are non-normal (“event risks”) Do appropriate stress testing
Determine appropriate risk tolerance Seek input across the institution
Build the concept of Financial Enterprise Risk Management
6www.treasuryinstitute.org
Building an enterprise-wide framework (flows)
Endowment
Treasury
Operations
Capital / Commitments
Other Support
Maximize long-term return
Make annual distributions
State revenues Federal grants, other
Net tuition & fees Auxiliary net revenues
Building, acquisition Institutional
commitments
Debt
Expected periodic fund flows
Funding Debt service
7www.treasuryinstitute.org
Building an enterprise-wide framework (risks)
Endowment
Treasury
Operations
Capital / Commitments
Other Support
Potential payment holiday
Potential cuts Shift in demand statistics
Unforeseen expenditures
Reduction in expenditures
Debt
Potential Disruptions / Recourses
Access to capital risk Taxable borrowing
capacity Bank risk
8www.treasuryinstitute.org
Determining exposure to certain risk factors
Endowment
Treasury
Operations
Capital / Commitments
Other Support
Debt
Investments Domestic equities, international equities, domestic fixed income, international fixed income, treasuries, short-term rates
Debt Short-term interest rates, long-term interest rates, bank support
Operating environment Student demand, net tuition & fees
Other Inflation, construction costs, bank credit support, state/federal support, student loans, annual giving
9www.treasuryinstitute.org
Summary of key overall risk topics
Investment performance continues to drive overall risk exposures Which is more important: risk in net assets or risk in the annual budget?
Risk is highly inter-related across the institution between investments, funding and operations, requiring an integrated management approach
Liquidity is the key metric of risk between these different exposures and should be actively managed
Rigorous stress testing must become a more routine part of risk management – assumptions will always be wrong in some way
10www.treasuryinstitute.org
Integrated risks require integrated management
Risks across the institution are increasingly inter-related, though management is sometimes de-centralized Endowment, Investments, Treasury, Debt, Strategy, Advancement, Admissions
Many schools have bridged these divides through new management structures Coordination of investment, financing, strategy at the board/committee level
Elevation of risk officers and Enterprise Risk Management professionals
Management committees across multiple disciplines
11www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
12www.treasuryinstitute.org 12www.treasuryinstitute.org
WashU overview Key stats (as of June 30,2010)
Number of Students Approx. 12,300
Investments $ 5.525 billion
Debt Outstanding $1.254 billion
Debt Structure 22% Variable / 78% Fixed
Swaps$90.5 million SIFMA variable to fixed$9.98 million LIBOR variable to fixed
Endowment distribution % of operations:
11%
Liquidity 35% - 40%, one-month
Credit Rating Moody’s – Aaa , S&P – AAA
Academic Ranking(US News 2011 Rankings)
Undergraduate 13th
School of Medicine 4th
13www.treasuryinstitute.org 13www.treasuryinstitute.org
WashU overviewRisk governance structure – Board of Trustees Committees
University Finance Committee Reviews and approves the broadest range of financial matters including
budgets, debt, liquidity, insurance, and tuition rates Asset Management Committee
Reviews endowment return estimates and approves payout projections Reviews investments of operating funds
Audit Committee Reviews broad range of compliance matters in addition to financial audit;
Chief compliance officer reports to this committee WU Investments Management Committee – Separate from BOT
Oversees all matters related to endowment performance Executive Committee
Final approval on financial matters
Chief Financial Officer responsible for financial risk oversight through these Committees
14www.treasuryinstitute.org 14www.treasuryinstitute.org
UVa overview Key stats (as of June 30,2010)
Number of Students Approx. 21,000
Investments (excl. foundations) Approx. $3.6 billion
Debt Outstanding $992 million
Debt Structure 14% Variable / 86% Fixed
Swaps $100 million SIFMA fixed payer
Endowment distribution % of operations:
6%
Liquidity 212.8 annual days cash on hand (FYE 2009)
Credit Rating Moody’s – Aaa , S&P – AAA, Fitch - AAA
Academic Ranking(US News 2011 Rankings)
Undergraduate - Overall 25th (tied)
Undergraduate – Publics 2nd
15www.treasuryinstitute.org 15www.treasuryinstitute.org
UVa overviewRisk governance structure
University Finance Committee responsible in all matters relating to the University's financial affairs and
business operations Audit & Compliance Committee
responsible for all matters relating to financial accounting and reporting and has direct access to internal and external auditors to assess their performance, the scope of audit activities and the adequacy of the system of internal accounting controls
UVIMCO Board of Directors Oversees all matters related to endowment performance
ERM Initiative Lead by CFO Currently being reviewed with new President for assignment of Strategic,
Operational, and Compliance risks.
16www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
17www.treasuryinstitute.org
Big issue #1: Sizing liquidity What is the “optimal level of liquidity”
Difficult to answer because of the number of different factors involved What are the different potential uses of liquidity? What are the potential sources of liquidity and how likely is it that the institution will have access to different sources of liquidity?
Developing a liquidity framework Distinguish between committed sources of liquidity (cash) and uncommitted sources of liquidity (CP draws, bank lines) Establish liquidity needs in “normal” environments and in a variety of stressed environments
“Liquidity is like the air in this room, you don’t really notice it until its gone”
Segmenting optimal cash balances
The above chart is shown for illustrative purposes only.
ConsiderationsSegment optimal cash balance by liquidity needs
Segment optimal cash balance by liquidity needs
Operating Cash(Horizon-Daily)
Strategic Cash (Horizon—Longer-term)
Reserve Cash(Horizon—Daily / Monthly)
70
40
60
90
0
10
20
30
50
80
Op
era
tin
g
Forecasted excess balances for a particular near-term or cyclical purposeR
eserv
eS
trate
gic
Restricted Cash(Horizon—Longer-term)
Restr
icte
d
4S T
R A
T E
G I
C
L I Q
U I
D I
T Y
M
A N
A G
E M
E N
T
Funds daily operating needs which may be subject to unforeseen volatility
Held in restricted account or as collateral for certain credit agreements
No short-term forecasted use; investment horizon usually one year or longer
19www.treasuryinstitute.org
WashU - Developing a Liquidity Framework
Committed sources
Cash (same day availability), Short term investments (2 day-2 week availability) Committed lines of credit
Established liquidity needs in a “normal” environment
Operating swings: $100 million drawn or excess in any given day over course of 1 month
Policy to keep no less than $50 million immediately available cash
Stressed liquidity with potential worst case scenarios
19www.treasuryinstitute.org
20www.treasuryinstitute.org
UVa - Developing a Liquidity Framework
Current Approach Determine liquidity needs by:
Identifying cash flow cycle troughs Identifying max consecutive day needs Rating agency reviews Holding enough buffer to be comfortable
Developing Approach Identifying risk profile (sources, uses, drivers)
Identifying risk tolerance
Consolidate Modeling efforts
Stress test scenarios
Determine a cost of liquidity
20www.treasuryinstitute.org
21www.treasuryinstitute.org
Big issue #1: Sizing liquidity($MM) Normal Stress Environment
1 Week 6 Months 12 Months 1 Week 6 Months 12 Months
Liquidity Sources
Tier 1 Cash 200 200 200 200 200 198
Tier 2 Cash 100 100 100 100 99 98
Treasury Investments 200 200 200 190 188 184
Total Committed Liquidity 500 500 500 490 487 480
Uncommitted Sources
Endowment Distribution/Loan 250 250 250 - - -
Bank SBPA 300 300 300 300 300 300
Bank Operating Lines 500 500 500 475 375 200
Debt Capacity (CP or Bonds) 250 250 250 - 200 150
Total Liquidity Sources 1,800 1,800 1,800 1,265 1,362 1,130
Liquidity Uses
Uncommitted Funding (VRDBs, etc.) 300 300 300 300 300 300
Endowment Payout Holiday - - - - 350 350
Operational Contingency 50 300 500 100 500 500
University Commitments 50 200 250 50 200 250
Total Liquidity Uses 400 800 1,050 450 1,350 1,400
Committed Liquidity Ratio 1.25 0.63 0.48 1.09 0.36 0.34
Uncommitted Liquidity Ratio 4.50 2.25 1.71 2.81 1.01 0.81
S
ourc
esU
ses
22www.treasuryinstitute.org
Big issue #2: Debt structure
Understand the relationship between capital structure and liquidity Short-term funding and rolling debt has an effect on liquidity Liquidity related to investment activity should relate to the choice of debt structure (fixed vs. floating, committed vs. uncommitted)
The “right” amount of uncommitted funding relates to excess liquidity Choices of interest rate mix are a second order decision that can be managed with certain derivative solutions where warranted
23www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
24www.treasuryinstitute.org 24www.treasuryinstitute.org
WashU key management risk factors & recent actions Management Risk Factors
Debt policy is conservative – no changes required after financial crisis Endowment asset allocation – little change
Recent Actions Bi-weekly meetings with endowment director of risk management More frequent monitoring on financial health of banks, insurers and other
counterparties Increased committed operating lines of credit Reviewed overall asset allocation of operating funds Diversified SBPA providers; moved from 364-day to multi-year facilities
Other Actions Developed crisis management team Committee formed to review how the University handles Enterprise Risk
Management
25www.treasuryinstitute.org
WashU risk dashboardMetric WashU Peer Avg*
Ratings Aaa/AAA Aaa-A3
Net Assets ($mm) $5,680 $5,221
Total Cash and Investments $4,953 $5,039
Total Volatility ($mm) $427 $474
Total Volatility (%) 7.52% 8.14%
95% Worst Net Assets ($mm) $4,843 $4,292
Operating Margin Volatility (%) 0.57% 2.03%
Investment Portfolio Volatility (%) 8.50% 8.38%
Operating Revenue from Investments (%) 15.0% 20.3%
Balance Sheet Leverage 1.33 1.58
Annual Liquidity to Total Volatility 5.12 4.89
Annual Liquidity to Operating Risk 6.76 6.12
Annual Liquidity to Puttable Debt 6.28 4.50
* Private institutions, definitions summarized in the appendix. Source: Moody’s Municipal Financial Ratio Analysis & J.P. Morgan, additional information available upon request.
26www.treasuryinstitute.org
UVa key management risk factors & recent actions
Risk Factors Risks assessed in a vacuum
Cash flow, liquidity, debt capacity, debt ratios, ERM scenarios
Inputs are unique to each analysis
Recent Actions Exploring a financial model to create a data warehouse.
Model would be used to change variables and financial statement impact
Data could be used for risk analysis and measurement
27www.treasuryinstitute.org
UVa risk dashboardMetric UVA Peer Avg*
Ratings Aaa/AAA Aaa-Aa3
Net Assets ($mm) $4,803 $5,535
Total Cash and Investments $3,569 $3,569
Total Volatility ($mm) $396 $442
Total Volatility (%) 8.24% 5.98%
95% Worst Net Assets ($mm) $4,027 $4,668
Operating Margin Volatility (%) 0.52% 1.53%
Investment Portfolio Volatility (%) 7.78% 6.38%
Operating Revenue from Investments (%) 9.20% 5.33%
Balance Sheet Leverage 1.31 1.66
Annual Liquidity to Total Volatility 2.91 7.67
Annual Liquidity to Operating Risk 5.27 6.76
Annual Liquidity to Puttable Debt 7.20 5.63
* Public institutions, definitions summarized in the appendix. Source: Moody’s Municipal Financial Ratio Analysis & J.P. Morgan, additional information available upon request.
28www.treasuryinstitute.org
UVa Central Bank risk profileSummary Pro Forma Risk Exposure Map1Summary Pro Forma Risk Exposure Map1
Exposure
2011 Pro Forma Annual Return (%)
Pro Forma Annual
Volatility (%)
Pro Forma Balance
6/ 30/ 2010
Pro Forma Annual
Return FY 2011 ($)
Pro Forma Annual
Volatility FY 2011 ($)
Cash and Cash Equivalents 1.25% 0.5% 12.8 0.16 0.1
Investments - Short Term 1.25% 0.5% 213.7 2.67 1.1
Investments - Long Term 8.00% 12.0% 522.4 41.8 67.7
Investments - Restricted CRP 8.00% 12.0% 120.4 9.6 24.7
Internal Loans Receivable - CRP 4.75% 0.0% 903.4 46.8 0.0
Internal Loans Receivable - Working Capital 4.75% 0.0% 2.5 0.1 0.0
Direct Loans Receivable (VCBA & State Issued) 4.50% 0.0% 73.6 3.3 0.0
Investments - Restricted Debt Proceeds 3.50% 0.5% 115.0 4.0 0.6
Total Assets 1,964.0 108.5 93.1
Long-Term Debt -3.09% 0.16% 938.1 (29.0) 1.5
Swap MtM 15.68% 9.2 0.0 15.1
Commercial Paper -1.00% 0.00% 55.6 (0.6) 0.1
Internal Investment Program Deposits -1.00% 0.00% 354.4 (3.5) 0.0
Due to Construction Projects 0.00% 0.00% 231.2 0.0
Due to Departments 0.00% 0.00% 344.1 0.0
Other Liabilities (6.5)
Total Liabilities 0.74% 1,926.0 (33.1) 13.8
Subtotal 75.4 110.3
Benefit of Diversification (28.1)
Total 75.4 82.2
29www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
30www.treasuryinstitute.org 30www.treasuryinstitute.org
WashU beyond the numbers
What keeps you up at night? What have we failed to recognize as a risk? Concern that we are too conservative
What makes you sleep well? Knowing that we are conservative
31www.treasuryinstitute.org
UVa beyond the numbers
What keeps you up at night? Collateral risks
The lack of good risk management data tools
Missed opportunities
What makes you sleep well? Conservative nature of University
Internal and external vetting of position
32www.treasuryinstitute.orgwww.treasuryinstitute.org
We welcome your questions
33www.treasuryinstitute.org
Agenda Developing a Comprehensive Risk Framework
Overview of Risk Approach for WashU and UVA
Today’s Big Issues: Liquidity and Debt Structure
Recent Risk Management Actions & Data Analysis
Summary Observations
Appendix: Industry risk study results
34www.treasuryinstitute.org
Study Results
Source: Moody’s Municipal Financial Ratio Analysis & J.P. Morgan, additional information available upon request.
Private Institutions Public InstitutionsMetric Average Min Max Average Min MaxTotal Assets ($mm) 7,635 766 45,004 9,321 1,291 42,057Expendable Financial Resources ($mm) 3,377 -19 23,574 2,451 263 10,070Total Cash & Investments ($mm) 5,039 231 32,193 3,569 201 13,954Net Assets ($mm) 5,221 437 30,140 5,535 752 24,025Total Volatility ($mm) 474 21 3,017 442 12 4,500Total Volatility (%) 8.14% 4.89% 13.26% 5.98% 1.59% 22.64%Operating Margin Volatility (%) 2.03% 0.57% 4.42% 1.53% 0.52% 4.33%Operating Revenue from State (%) 0.29% 0.00% 8.00% 19.27% 7.30% 34.70%Operating Revenue from Investments (%) 20.32% 4.00% 53.00% 5.33% 1.30% 14.60%Equities and Alternatives as (%) of Invested Assets 78.19% 54.10% 95.90% 50.70% 0.00% 94.59%Investment Portfolio Volatility (%) 8.38% 5.47% 13.71% 6.38% 3.13% 10.41%Total Revenues ($mm) 1,799 154 5,462 4,159 809 18,927Balance Sheet Leverage (x) 1.58 1.18 2.78 1.66 1.31 2.48"Total" Leverage 1.72 1.23 3.36 1.91 1.33 4.33Debt to Cap. (x) 0.24 0.10 0.56 0.24 0.15 0.44Cash to Debt (x) 3.76 0.48 9.16 2.00 0.40 4.70D/S to Operations (%) 4.88% 2.10% 28.90% 3.26% 1.00% 7.00%Annual Liquidity to Puttable Debt (x) 4.50 0.43 27.13 5.63 0.98 24.65Annual Liquidity to Operating Risk (x) 6.12 1.96 10.88 6.76 2.51 12.02Annual Liquidity to Total Volatility (x) 4.89 1.33 9.81 7.67 1.71 17.84Expendable Resources to Debt (x) 2.47 -0.02 7.49 1.45 0.39 2.87Expendable Resources to Ops (x) 2.59 -0.02 9.25 0.64 0.22 1.59
35www.treasuryinstitute.org
Study Institutions
Public Institutions:California State UniversityIndiana UniversityMichigan State UniversityThe Ohio State UniversityPennsylvania State UniversityPurdue UniversityRutgersTexas A&M SystemUniversity of ArizonaUniversity of CaliforniaUniversity of MichiganUniversity of MinnesotaUniversity of Missouri SystemUniversity of North Carolina at Chapel HillUniversity of PittsburghUniversity of Texas SystemUniversity of VirginiaUniversity of WashingtonWest Virginia University
Private Institutions:American UniversityAmherst CollegeBoston UniversityBrandeis UniversityBrown UniversityCollege of the Holy CrossColumbia UniversityCornell UniversityDartmouth CollegeDuke UniversityEmory UniversityGeorge Washington UniversityGeorgetown UniversityHarvard UniversityJohns Hopkins UniversityLehigh UniversityMassachusetts Institute of TechnologyNew York UniversityPrinceton University
Quinnipiac UniversityRensselaer Polytechnic InstituteRice UniversitySmith CollegeStanford UniversityTufts UniversityUniversity of ChicagoUniversity of PennsylvaniaUniversity of RichmondVanderbilt UniversityVassar CollegeWake Forest UniversityWashington UniversityWilliams CollegeYale University
36www.treasuryinstitute.org
Key Definitions Volatility is a key measure of annual risk that is approximated with a standard deviation Net Asset Total Volatility (%) = Annual Enterprise Dollar Volatility ($) / Net Assets ($) Operating Margin Volatility (%) = Calculated volatility over past 5 years from Moody’s Balance Sheet Leverage = Total Assets / Net Assets “Total” Leverage = (Total Assets + Pension Assets + Swap Notional) / Net Assets Annual Liquidity to Total Volatility = Moody’s Annual Liquidity / Calculated total Enterprise
Volatility Annual Liquidity to Operating Risk = Moody’s Annual Liquidity / (Operating Margin Volatility
($) + Operating Revenue from Investments ($)) Annual Liquidity to Puttable Debt = Moody’s Annual Liquidity / Puttable Debt
Puttable debt: Debt subject to short-term refinancing risk, including VRDBs, CP, etc. Expendable Resources to Operations = Moody’s Expendable Resources / Total Operations Expendable Resources to Debt = Moody’s Expendable Resources / Total Debt Debt Service to Operations = Peak Debt Service / Total Operations