Cornell University 2011-2012 Annual Report - DFA Home - Cornell ...

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands)The University continues to utilize both tax-exempt and taxable commercial paper programs. Tax-exempt commercialpaper is used to finance capital projects and equipment purchases for the Ithaca and Medical College campuses. Taxablecommercial paper is used also for these purposes, and could be used to finance short-term working capital needs. Themaximum authorized amount of each Commercial Paper program is $200,000.Scheduled principal and interest payments on bonds and notes for the next five fiscal years and thereafter are shown below:ANNUAL DEBT SERVICE REQUIREMENTSYear Principal Interest Total2013 $ 39,543 $ 106,583 $ 146,1262014 289,540 104,209 393,7492015 49,452 90,602 140,0542016 35,239 85,924 121,1632017 36,672 81,858 118,530Thereafter 1,446,112 901,985 2,348,097Total $ 1,896,558 $ 1,371,161 $ 3,267,719In estimating future interest payments, the University uses the interest rate associated with the swap agreement until thetermination date, where applicable. For unhedged taxable commercial paper debt, the University estimates future interestpayments based on the 5-year London Interbank Offered Rates (LIBOR) swap rate.B. Interest Rate SwapsThe University approved the use of interest rate swaps to mitigate interest rate risk for its variable rate debt portfolio.The swap agreements cover current variable-rate debt as well as future debt exposure. Interest rate swaps are derivativeinstruments; however, their use by the University is not considered to be hedging activity, based on definitions in generallyaccepted accounting principles.Through the use of interest rate swap agreements, the University is exposed to the risk that counterparties will fail to meettheir contractual obligations. To mitigate the counterparty credit risk, the University entered into contracts with carefullyselected financial institutions based upon their credit ratings and other factors, and maintains dollar-limit swap exposurefor each institution. Master agreements with counterparties include master netting arrangements as further mitigation ofcredit exposure to counterparties. These arrangements permit the University to net amounts due to the counterparty withamounts due from the counterparty, which reduces the maximum loss from credit risk in the event of counterparty default.During the year ending June 30, 2012, the University transferred swap agreements from Morgan Stanley Derivative Products,Inc. to Morgan Stanley Capital Services, LLC. The novation revised collateral terms of the agreement but did not changethe effective interest rates or other significant terms.The University’s swap agreements contain a credit-risk contingent feature in which the counterparties can request collateralizationon agreements in net liability positions. The University could be required to post collateral if the University’scredit rating is downgraded to A1 or A+. At June 30, 2012, the University had collateral on deposit with counterparties inthe amount of $0 compared to $26,461 at June 30, 2011.The University follows accounting guidance that defines fair value, establishes a framework for measuring fair value andexpands disclosure requirements about fair-value measurements, including derivatives. The University’s interest rateswaps are valued by an external swap consultant that uses the mid-market levels, as of the close of business, to value theagreements. The valuations provided are derived from proprietary models based upon well-recognized financial principlesand reasonable estimates about relevant future market conditions and the University’s credit worthiness. The University’sinterest rate swap arrangements have inputs that can generally be corroborated by market data and are classified as Level2 in the fair-value hierarchy.At June 30, 2012, the University had eight interest rate swap agreements to exchange variable-rate cash flows for fixed-ratecash flows without the exchange of the underlying principal amount. Net payments or receipts under the swap agreementsare recorded as adjustments to interest expense and the incremental interest expense is disclosed in the table below. Twoswap agreements that were executed during previous fiscal years became effective in fiscal year 2012. The interest expenserelated to these swaps is included in the interest expense on the Statement of Activity. In all agreements in effect at June30, 2012, the counterparty pays a variable interest rate equal to a percentage of the one-month London Interbank OfferedRates (LIBOR).32