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Internal Long-Term Financing Program

Background

Program Description

Approvals Required

Interest Rates

Documentation

 

Background

Capital projects are funded from a variety of sources such as donations and government grants, and include long-term financing if necessary. Such financing is obtained from a mix of internal and external funds, the origin of which will be transparent to the internal borrower. This section provides guidelines under which financing is provided.

 

Program Description

Internal financing is available for approved capital projects upon completion of the project’s construction. This program does not include construction financing which is provided on a short-term basis while projects are under construction.

The Financial Services Department, under the direction of the Chief Financial Officer, will act as the lender and provide internal loans to the University community to finance these projects. Financial Services will determine the terms of the loan, the interest rate, the amortization period and the source of the loan as part of its overall cash management responsibilities.

Divisions entering into loan arrangements will be responsible for the blended equal monthly repayments of principal and interest.

 

Approvals Required

Please contact Helen Choy for details at .

 

Interest Rates

The interest rate will be determined based on market conditions and will be based on the Canadian swap curve plus a spread of 200 basis points*. The spread relates to the University’s credit rating, reflecting how financial institutions would price a loan to the University in the open market. It also relates to the project risk and administrative costs. The spread may vary over time on a project by project basis.

*For amortization periods of 25 years and above, and until such time as external debenture financing has been exhausted, the interest rate will be the greater of the Canadian swap curve plus 200 basis points, the Government of Canada bond curve plus 200 basis points, and the UofT debenture issue rate plus issuing cost and the cost of the negative carry. The negative carry represents the cumulative shortfall, between the interest earned and the interest paid on the loan amount, from the date of the UofT debenture issue to the date of providing the loan. This will ensure that the internal loan rate will be no less than the total cost of the debenture issue including any cost incurred as a result of delays in allocating internal loans.

The above approach may be revised from time to time by the Vice-President, Business Affairs. In addition, the interest rate stipulated in a loan agreement is subject to change during the term of the loan if deemed necessary by the lender.

The University recommends using an 8% interest rate for the modeling of long-term financing costs.

 

Documentation

For each internal loan, a standard loan agreement will be prepared by the Financial Services Department and will be signed by the Chief Financial Officer and the Head of the division responsible for the principal and interest repayments. An amortization schedule for the loan will be appended to the agreement. Click on the following links for a sample loan agreement and a sample loan amortization schedule.

For more information, please contact the Accounting Manager at 978-2981.

Last revision: October 8, 2009