Due Diligence for Debt Funded Projects

The University of Illinois System has approximately $1.38 billion of outstanding debt in the form of Auxiliary Facilities System (AFS) Bonds, Health Services Facilities System (HSFS) Bonds, Certificates of Participation (COPs), and Energy Service Contracts (ESCOs). A system wide capital planning process has been initiated at the request of the Board of Trustees and is being coordinated through my office. Many of the projects identified as part of the planning process contemplate debt financing in addition to other sources of capital. The CFO office will work with those units on their financial plans. In order to manage the System’s debt capacity prudently and to maintain a favorable credit rating, it is necessary to conduct financial due diligence to determine the potential for bond financing.

As the initial step in investigating the potential debt financing for a project, the sponsoring unit, after approval from relevant university offices, should seek approval of debt financing by submitting the following information to the system treasury office:

  1. Name of project and sponsoring unit.
  2. Brief project summary including project purpose, scope and priority.
  3. Evidence that project is part of the University’s long-term capital plan and compliant with its master plan.
  4. A copy of the Project Data Summary Form that includes proposed location, size, intended use, special features, proposed timeline, etc.
  5. Estimated project budget including amount of proposed debt.
  6. Financial analysis aimed at demonstrating ability of the sponsoring unit to make required annual payments including the primary and secondary sources of repayment. The analysis should include details of current funds and/or future revenue streams identified to support project costs and annual payments; annual revenues and expenses for past three years; and a list of any existing debt obligations of the unit.
  7. Letter of support and agreement to procure debt financing from Chancellor or Provost (or VCHA at UIC).
  8. Any other information in support of the project.

The Director of Capital Financing at the system’s treasury office can provide assistance with estimating the debt repayment obligations for projects prior to submission. It is recommend that sponsoring units review the project budget and financial analysis with that office. Once project debt financing is approved, the Capital Financing office will coordinate the issuance of that debt following project approval by the board.

If you have any questions please do not hesitate to contact me or Robert Plankenhorn, Assistant Vice President Treasury Operations, (217) 244-3400, rplanken@uillinois.edu.

Approval Process for P3 Projects

Universities are increasingly using Public-Private Partnerships (P3) to achieve their physical infrastructure goals. The U of I System initiated its first large scale P3 project at Chicago last year and a number of other projects are currently under consideration. Effective P3s are a valid mechanism for capital delivery and can provide a number of benefits such as expedited project delivery, access to capital and expertise.

Given that the use of P3s is relatively new within the university, procedures for obtaining approval and completing appropriate due diligence are currently not well specified. This memo is intended to provide some initial guidelines for that purpose.

A P3 project creates long-term obligations similar to those from a bond issuance. Although the debt is off our books, it is on our credit. Thus, a thorough financial due diligence is an essential step in the approval of P3 projects. The rating agencies and investors will also review the viability of the P3 project prior to bond issuance.

As the initial step in seeking approval of a P3 project, after prior approval from the University, the sponsoring unit should submit to the CFO/Comptroller a document containing the following information:

  1. Name of project and sponsoring unit.
  2. Brief project summary including project purpose, scope and rationale.
  3. Evidence that project is part of the University’s long-term capital plan and compliant with its master plan.
  4. Technical Details: Proposed location, size, intended use, special features, proposed timeline, etc.
  5. Estimated project budget including equity contribution and debt level.
  6. Financial analysis aimed at demonstrating ability of the sponsoring unit to make required annual payments. The analysis should include details of current funds and/or future revenue streams identified to support project costs and annual payments. Units should also provide their revenues and expenses for past three years and list of any existing debt or other obligations. The viability of the financial analysis should be reviewed by the chief budget officer of your university and acknowledged with a recommendation.
  7. Letter of support from Chancellor or Provost/VCHA.
  8. Any other information in support of the project.

Once the project is approved, the first formal step in the P3 procurement process is the issuance of an RFP consistent with the state procurement policy. The Director of Real Estate has the responsibility to initiate and manage the P3 procurement process in coordination with the State Higher Education Procurement Officer and appropriate university officials.

Upon the successful selection of a developer team, it is typical to enter a “Predevelopment Agreement” or risk share agreement for initial design and developer due diligence. While the Comptroller may have the delegated authority to enter into such agreements on behalf of the Board, the Comptroller may choose to consult with the Board prior to proceeding.

All P3 projects must be formally approved by the BOT during a scheduled meeting prior to executing the final agreements for the ground lease and sublease and any other agreement. In most cases this will involve a design presentation. The CFO office will schedule and organize presentations to the board and any request for approval.

For general questions regarding P3 and P3 approval procedures please contact Bruce Walden, Senior Director of Real Estate & Planning Services, (217) 300-6732, bwalden@uillinois.edu.

For help with preparing financial analysis please contact Robert Plankenhorn, Assistant Vice President Treasury Operations, (217) 244-3400, rplanken@uillinois.edu.

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