Ontario Budget 2007: Chapter IV: Borrowing and Debt Management

Long-Term Public Borrowing

As an agency of the Ministry of Finance, the primary responsibility of the Ontario Financing Authority (OFA) is to manage the borrowing, debt, investment and cash management activities of the Province and the Ontario Electricity Financial Corporation (OEFC) in a timely and cost-effective manner. The OEFC is the agency of the Province responsible for managing the debt and certain other liabilities of the former Ontario Hydro Inc.

The interim long-term public borrowing requirement for 2006–07 is $18.7 billion, down $2.1 billion from the $20.8 billion estimated in the 2006 Budget Plan. This decline is largely due to the elimination of the deficit.

Approximately $14.2 billion, or 76 per cent, of the borrowing program was completed in the domestic bond market through a number of instruments, including:

• syndicated bonds
• medium-term notes
• Ontario Savings Bonds
• bond auctions
• floating rate notes.

 

 

The Province also issued bonds in other currencies, including:

• three $1 billion Global bonds in U.S. dollars
• Euro Medium-Term Notes (EMTNs) in U.S. dollars, South African rand and, for the first time, Turkish lira
• an inaugural Kangaroo (Australian dollar) bond.

The OFA maintained a flexible approach to borrowing, monitoring both domestic and international capital markets to minimize debt service costs and diversify the borrowing program. Approximately $4.5 billion, or 24 per cent, of the borrowing program was raised from international markets.

The format of the borrowing table has changed from the 2006 Ontario Budget to more clearly communicate the Province’s borrowing program and its drivers. The top half of the table contains items that make up the Total Funding Requirement. Total Long-Term Public Borrowing Requirement is reached by adjusting the Total Funding Requirement by Canada Pension Plan Borrowing and net changes in Short-Term Borrowing and Cash. Non-Cash Items Included in Deficit was renamed Non-Cash Adjustments, which now includes Amortization of Major Tangible Capital Assets. Other Uses /(Sources) of Cash was renamed Net Loans/Investments.

 

Table 2
Medium-Term Borrowing Outlook: Province and OEFC
($ Billions)

	2007–08	2008–09	2009–10
Deficit/(Surplus)	0.4	(0.3)	(0.4)
Non-Cash Adjustments	(0.5)	(0.8)	(0.7)
Investment in Capital Assets	3.3	3.5	4.0
Net Loans/Investments	1.2	0.9	0.2
Debt Maturities:
Currently Outstanding	14.4	20.1	14.4
Incremental Impact of Future Financing	–	–	0.6
Debt Redemptions	0.9	0.7	0.7
Total Funding Requirement	19.7	24.1	18.8
Canada Pension Plan Borrowing	(0.4)	(0.6)	(0.7)
Decrease/(Increase) in Short-Term Borrowing	(0.5)	(0.6)	0.9
Increase/(Decrease) in Cash and Cash Equivalents	–	–	–
Total Long-Term Public Borrowing Requirement	18.8	22.9	19.0
Note: Numbers may not add due to rounding.

Refinancing maturing debt remains the primary component of the medium-term borrowing outlook. Debt maturities for the Province and the OEFC are projected at $14.4 billion in 2007–08, $20.1 billion in 2008–09 and $15.0 billion in 2009–10.

As long as cost-effective opportunities continue to be available, at least 25 per cent of the long-term borrowing program will be raised from international markets.

The government will seek approval by the legislature for additional borrowing authority to meet program requirements. In addition, it will propose amendments to the Capital Investment Plan Act, 1993 to support the execution of the borrowing program by the OFA.

Debt

The Province’s total debt is projected to be $157.1 billion as at March 31, 2007, compared to $154.9 billion as at March 31, 2006. Total debt represents all borrowing without offsetting financial assets.

Ontario’s net debt, the difference between total liabilities and total financial assets, was $141.9 billion as at March 31, 2006, and is projected to be $143.0 billion as at March 31, 2007.

While the Province is projecting a surplus for 2006–07, total debt is expected to increase due to the government’s capital investments in key priority areas and loans to school boards for capital projects. The increase in net debt is primarily a result of the government’s capital investments.

Investing in these projects is similar to a family investing in a house using a mortgage, which is paid off over time. Like a mortgage, where the total amount is borrowed at the time a house is purchased, the government borrows the entire amount required to invest in capital investments during construction. This increases total and net debt. On an annual basis, the impact on the government’s deficit or surplus is limited to the amortization costs of these capital investments. Amortization spreads the cost of these investments over the useful life of the assets, instead of charging the total costs upfront for an asset that will be used for many years.

Debt of the Ontario Infrastructure Projects Corporation ("OIPC" or "Infrastructure Ontario") is projected to be $1.3 billion as at March 31, 2007. This debt is included in total debt; however, the impact on net debt is minimal, as its debt is offset by projected net assets of $1.1 billion. Infrastructure Ontario’s debt is not guaranteed by the Province.

Interim 2006–07 results for the OEFC show an excess of revenue over expense of $0.8 billion, reducing its unfunded liability (or "stranded debt of the electricity sector") from $19.3 billion to $18.5 billion as at March 31, 2007. This is the third consecutive year in which stranded debt has been paid down. Projected 2007–08 results for the OEFC are an excess of revenue over expense of $1.1 billion, resulting in a further projected reduction in its unfunded liability to $17.4 billion as at March 31, 2008.

Total Debt Composition

Total debt is composed of bonds issued in both the short- and long-term public capital markets and non-public debt.

Public debt totals $134.6 billion, primarily consisting of bonds issued in the domestic and international long-term public markets in 11 currencies. Ontario also has $22.5 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of non-marketable debt instruments issued to public-sector pension funds and government agencies, including the Canada Pension Plan (CPP).

Debt Management

The Province mitigates the financial risks associated with its capital market activities by adhering to prudent risk management policies and exposure limits.

The Province limits itself to a maximum interest rate resetting exposure of 35 per cent of debt issued for Provincial purposes and a maximum foreign exchange exposure of five per cent of debt issued for Provincial purposes. In fiscal 2006–07, the interest rate resetting exposure policy limit was increased from 25 per cent to allow the Province to take advantage of lower floating rates.

All exposures remained well below policy limits in fiscal 2006–07.

Debt Maturities

The most significant component of the borrowing program is the refinancing of maturing debt. The OFA will continue to aim for a balanced maturity profile and take advantage of opportunities to schedule maturities into years that currently have lower levels of maturing debt.

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 6.02 per cent as at March 31, 2007 (March 31, 2006, 6.14 per cent). For comparison, as at March 31, 1993, the effective interest rate on total debt was 10.14 per cent.

As at March 31, 2007, the effective interest rate on public debt is estimated at 5.48 per cent (5.52 per cent as at March 31, 2006), compared to an estimated 9.24 per cent on non-public debt (9.49 per cent as at March 31, 2006).

Until May 2006, the Bank of Canada continued to increase its benchmark target for the overnight interest rate. The overnight rate has not changed since that time as economic growth has moderated. Long-term rates remain near their lowest level in 50 years, resulting in a flatter yield curve.

Net Debt-to-GDP

Net debt-to-GDP peaked at 32.9 per cent in 1999–2000, the year the Province first consolidated the unfunded liability (or “stranded debt”) of the OEFC. Since then, Ontario’s net debt-to-GDP ratio has trended downward, declining from 26.4 per cent in 2005–06 to 25.9 per cent in 2006–07. The current outlook projects a ratio of 25.5 per cent in 2007–08, 24.6 per cent in 2008–09 and 23.9 per cent in 2009–10.

 

 

 

 

 

 

 

Consolidated Financial Tables

Table 3
Net Debt and Accumulated Deficit Interim 2007
($ Millions)

	2002–03	2003–04	2004–05	2005–06	Interim 2006–07	Plan 2007–08
Debt1
Publicly Held Debt
Bonds2	102,958	116,732	125,279	123,129	128,682	134,948
Treasury Bills	6,274	3,359	3,747	5,215	4,398	4,948
U.S. Commercial Paper2	1,515	1,156	269	706	195	195
Ontario Infrastructure Projects Corporation (OIPC)3	–	323	1,288	1,323	1,273	2,693
Other	438	422	404	387	–	–
	111,185	121,992	130,987	130,760	134,548	142,784
Non-Public Debt
Canada Pension Plan Investment Fund	10,746	10,233	10,233	10,233	10,233	10,233
Ontario Teachers' Pension Fund	10,387	9,487	8,666	7,596	6,411	4,466
Public Service Pension Fund	3,200	3,052	2,886	2,705	2,501	2,260
Ontario Public Service Employees' Union Pension Fund (OPSEU)	1,520	1,450	1,371	1,285	1,188	1,073
Canada Mortgage and Housing Corporation	1,078	1,047	1,003	960	913	864
Other4	356	1,096	1,231	1,367	1,308	1,289
	27,287	26,365	25,390	24,146	22,554	20,185
Total Debt	138,472	148,357	156,377	154,906	157,102	162,969
Cash and Temporary Investments	(7,252)	(8,139)	(13,422)	(6,258)	(5,726)	(5,750)
Other Net (Assets)/Liabilities5	1,427	(1,089)	(769)	(5,398)	(7,240)	(9,367)
OIPC Net (Assets)/Liabilities3	–	(313)	(1,265)	(1,322)	(1,111)	(2,538)
Net Debt	132,647	138,816	140,921	141,928	143,025	145,314
Non-Financial Assets6	(13,942)	(14,628)	(15,178)	(32,773)	(34,180)	(36,069)
Accumulated Deficit7	118,705	124,188	125,743	109,155	108,845	109,245
1 Includes debt issued by the Province and Government Organizations, including the OEFC.
2 All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts.
3 OIPC's interim 2006–07 debt is composed of Ontario Opportunity Bonds ($323 million), Infrastructure Renewal Bonds ($650 million) and short-term commercial paper ($300 million). OIPC's debt is not guaranteed by the Province. OIPC Net (Assets)/Liabilities include cash, temporary investments, accounts receivable, loans receivable, debt issue costs, accounts payable and loans payable.
4 Other non-public debt includes Ontario Municipal Employees Retirement Fund, College of Applied Arts and Technology Pension Plan, Ryerson Retirement Pension Plan, Ontario Immigrant Investor Corporation and indirect debt of school boards (the indirect debt of school boards was incurred in June 2003 to refinance the non-permanently financed debt of 55 school boards; an equivalent amount is included in Net Assets as advance payments to school boards).
5 Other Net (Assets)/Liabilities include accounts receivable, loans receivable, advances and investments in government business enterprises, accounts payable, accrued liabilities, pensions and the liability for power purchase agreements with non-utility generators.
6 Non-financial assets include the Province's tangible capital assets and net assets of hospitals, school boards and colleges, which, starting with fiscal year 2005–06, are consolidated using one-line consolidation.
7 Accumulated deficit represents net debt adjusted for non-financial assets. Starting with 2005–06, accumulated deficit includes the opening combined net assets of hospitals, school boards and colleges.
Source: Ontario Ministry of Finance.

Table 4
Debt Maturity Schedule Interim 2007
($ Millions)

	Currency
	Canadian Dollar	U.S. Dollar	Japanese Yen	Euro1	Other Currencies2	Interim 2006–07 Total	2005–06 Total
Fiscal Year Payable
Year 1	13,371	5,390	320	–	223	19,304	21,421
Year 2	15,083	4,095	–	795	265	20,238	14,019
Year 3	9,068	1,628	714	1,443	870	13,723	19,416
Year 4	6,195	–	–	–	252	6,447	13,115
Year 5	5,956	1,136	–	–	47	7,139	6,254
1–5 years	49,673	12,249	1,034	2,238	1,657	66,851	74,225
6–10 years	23,222	7,607	99	1,188	2,018	34,134	29,980
11–15 years	6,424	–	–	–	–	6,424	4,694
16–20 years	12,300	–	–	–	–	12,300	11,766
21–25 years	13,606	–	–	–	–	13,606	12,843
26–40 years3	23,787	–	–	–	–	23,787	21,398
Total4	129,012	19,856	1,133	3,426	3,675	157,102	154,906
Debt Issued
for Provincial
Purposes	104,060	16,562	1,133	3,426	2,748	127,929	125,550
OEFC Debt	23,679	3,294	–	–	927	27,900	28,033
OIPC Debt	1,273	–	–	–	–	1,273	1,323
Total5	129,012	19,856	1,133	3,426	3,675	157,102	154,906
1 Euro includes debt issued in Euro and French franc legacy currency.
2 Other Currencies comprise Australian dollar, New Zealand dollar, Pound sterling, Swiss franc, Hong Kong dollar, South African rand and Turkish lira.
3 The longest term to maturity is to June 2, 2047.
4 Total foreign currency denominated debt as at March 31, 2007 is $28.1 billion (2006, $27.4 billion). Of that, $27.1 billion or 96.4 per cent (2006, $26.3 billion or 95.9 per cent) was fully hedged to Canadian dollars.
5 Total debt includes issues totalling $2.7 billion (2006, $4.8 billion) that have embedded options exercisable by either the Province or the bondholder under specific conditions.

 

Derivative Financial Instruments

The table below presents a preliminary maturity schedule of the Province and the OEFC’s derivative financial instruments, by type, based on the notional amounts of the contracts. Notional amounts represent the face value of outstanding derivative contracts and do not reflect credit or market risk, or actual cash flows.

Derivatives are financial contracts, whose value is derived from underlying instruments. The Province uses derivatives to hedge and minimize interest costs. Hedges are created primarily through swaps, which are an exchange of payment streams between two counterparties. Swaps allow the Province to offset existing obligations, effectively converting them into obligations with more desirable financial characteristics. Other derivative instruments used by the Province include forward foreign exchange contracts, forward rate agreements, futures, options, caps and floors.

Table 6
Derivative Portfolio Notional Value Interim 2007
($ Millions)

Maturity in Fiscal Year	2007–08	2008–09	2009–10	2010–11	2011–12	6–10 Years	Over 10 Years	Interim 2006–07 Total	2005–06 Total
Swaps:
Interest rate	13,743	12,204	8,743	2,111	2,553	24,441	4,470	68,265	64,735
Cross currency	6,113	5,304	5,736	503	1,232	12,508	–	31,396	28,435
Forward foreign
exchange contracts	972	–	–	–	–	–	–	972	3,639
Caps and floors	50	–	88	–	–	–	–	138	532
Total	20,878	17,508	14,567	2,614	3,785	36,949	4,470	100,771	97,341