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Credit Risk Policy

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Section 1 - Purpose and Context

(1) The University's Credit Risk Policy establishes eligible counterparties with limits based upon counterparty credit rating and counterparty assessable shareholder’s funds.

(2) The policy complies with the suggested format of the Credit Risk Policy published in the Treasury Management Policy document issued by the NSW Treasury in July 2007.

(3) The objective of the Credit Risk Policy is to minimise the potential for counterparty default on investment transactions. Transactions are to be restricted to high credit quality counterparties who have a strong (or better) capacity to repay.

(4) To meet this objective in an efficient and effective manner, the University has established a credit risk management function for:

  1. approving credit exposure measurement standards;
  2. setting credit limits and monitoring their use;
  3. reviewing credits and concentrations of credit risk; and
  4. reviewing and monitoring risk reduction arrangements.

(5) This policy employs a ratings based approach to assess credit risk. This approach allows the use of external independent credit assessments and eliminates the need for the University to resource and perform individual credit evaluations. Counterparty credit risk is spread through the operation of rating percentage exposure limits.

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Section 2 - Definitions

(6) For the purpose of this policy the following definition applies:

  1. Credit Risk - is the risk of loss from a transaction arising from the default by one of the University's counterparties. For the University, this might result from investments or from any future derivative transactions and could occur either during the term of the transaction or upon settlement.
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Section 3 - Policy Statement

(7) Investments may only be made with an eligible counterparty. An eligible counterparty is a counterparty which:

  1. is incorporated in an A+ or better (S&P) rated OECD country; and
  2. is rated from S&P or Moody's at a level equivalent to long term BBB+ (S&P) or short term A3 (S&P) or better, and has accessible shareholder’s funds of at least $100 million.

(8) Short term exposure of less than one year may be incurred to the limit set out below where there is either no long-term rating or the long term rating is ineligible, but there is an S&P or Moody's short term rating of:

Table: Rating Limits

Short Term Rating S&P / Moody's Nominated Long Term Rating Limit (S&P) Nominated Long Term Rating Limit (Moody's)
A1+ / P1 AA Aa2
A1 / P1 A+ A1
A2 / P2 A A2
A3 / P3 BBB+ Baa1

Rating Reviews

(9) Counterparties placed on credit watch positive are to maintain current ratings and limits until a new rating is available.

(10) Counterparties placed on credit watch negative are to have long and short term ratings reduced by one notch, (except where the short term rating is affirmed), with the appropriate reduction in limits applied, until a new rating is available.

Use of Counterparty Assessable Shareholder’s Funds

(11) Assessable shareholder’s funds are to be determined as counterparty shareholder’s funds minus:

  1. Minority interest;
  2. Intangible asset;
  3. Share capital which is of a debt nature; and
  4. Asset revaluation reserve, where based on Director's valuation.

Determination of Limits

(12) Limits for individual counterparties are to be determined based on the value of the University's balance sheet and the rating of the counterparty.

Table: Counterparty Limits

Long Term Rating of Counterparty S&P / Moody's Percentage of Balance Sheet Credit Limit per Counterparty ($m)
AAA / Aaa [20%] [150]
AA+ / Aa1 [15%] [120]
AA / Aa2 [10%] [90]
AA- / Aa3 [8%] [75]
A+ / A1 [4%] [60]
A / A2 [2%] [40]
A- / A3 [2%] [30]
BBB+ / Baa1 [2%] [30]

(13) Commonwealth and State Government guaranteed entity limits are to be ratings based, and not subjected to the assessable shareholder’s funds test.

(14) NSW Treasury Corporation investments and Hour-Glass Facilities are eligible investments without limits.

(15) Where a counterparty receives the benefit of an unlimited and unrestricted parent guarantee, the limit is to be determined on the parent's rating and assessable shareholder’s funds.

(16) Where a parent guarantee is limited as to amount, assessable shareholder’s funds shall be the lesser of the limited guarantee amount and the assessable shareholder’s funds determined as per this policy.

(17) Credit limits are to be applied on a group basis, the total exposure to entities that are owned or guaranteed by a single entity is not to exceed the maximum credit limit of any entity in the group.

Calculation of the Utilisation of Limits

(18) The calculation as to the utilisation of limits for a particular investment instrument utilisation is to be based upon market value. Where market value is neither available nor consistent with standard practice in a particular market, the face value or a percentage of the face value, of the securities held may be used.

Table: Credit Risk Guidance for Financial Potential Instruments

Instrument Credit Weighting
Investments (as per current Investment Policy) Market value of investments. If the market value of the investment cannot be established, then 100%
Interest rate hedging products Fair value plus risk plus a risk premium based on potential fair value movements
Foreign exchange hedging products Fair value plus risk plus a risk premium based on potential fair value movements

Spread of Risks

(19) Percentage restrictions for aggregate exposures for counterparty rating groups are:

  1. A1+ short term exposure: minimum level of total exposures 20%
  2. A2 short term exposure: maximum level of total exposure 15%

Documentation

(20) Documentation provisions that mitigate credit risk and ensure transaction enforceability are required. Usage of the International Swaps and Derivatives Association documentation is recommended.

Reporting

(21) Breaches of prudential limits are to be reported to the Vice-Chancellor and President immediately and to the Board of Trustees monthly for ratification of action proposed or undertaken.

(22) The University endeavours to reduce any overexposure, provided no significant costs are incurred. If this is not possible the transaction should be allowed to mature provided the transaction is not greater than 180 days. Longer dated transactions should be liquidated unless specifically approved otherwise by the Board.