Ontario Budget 2009: Chapter IV: Borrowing and Debt Management

LONG-TERM PUBLIC BORROWING

Ontario successfully completed its 2008–09 borrowing program, despite the continuing challenges in the global financial markets. It did so by maintaining a flexible approach and by being responsive to the preferences of bond investors.

The interim long-term borrowing for 2008–09 is $28.7 billion, compared to $24.3 billion in the 2008 Budget. The difference is primarily due to the projected deficit.

In 2008–09, about 34 per cent ($9.7 billion) was borrowed in the international capital markets.

Bonds issued in foreign currencies were:

• Global bonds in U.S. dollars and euros
• Euro Medium-Term Notes (EMTNs) in U.K. sterling, Swiss francs, Japanese yen, and U.S. and Hong Kong dollars
• one Japanese yen loan.

About $18.9 billion, or 66 per cent, of borrowing was completed in the domestic market through a number of instruments, including:

• syndicated issues
• floating rate notes
• domestic medium-term notes
• bond auctions
• real return bonds
• Ontario Savings Bonds

Table 1
2008–09 Borrowing Program: Province and Ontario Electricity Financial Corporation
($ Billions)

	Budget Plan	Interim	In-Year Change
Deficit	0.0	3.9	3.9
Non-Cash Adjustments	(0.9)	1.9	2.8
Investment in Capital Assets	4.9	4.3*	(0.6)
Net Loans/Investments	1.3	0.9	(0.4)
Debt Maturities	20.5	20.3	(0.2)
Debt Redemptions	1.0	0.5	(0.5)
Total Funding Requirement	26.9	31.9	5.0
Canada Pension Plan Borrowing	(0.6)	(0.5)	0.1
Decrease/(Increase) in Short-Term Borrowing	(2.0)	(5.5)	(3.5)
Increase/(Decrease) in Cash and Cash Equivalents	0.0	2.8	2.8
Total Long-Term Public Borrowing Requirement	24.3	28.7	4.4

• ^* Using the medium-term outlook presentation, the equivalent number is $6.2 billion. The need to maintain consistency with the 2008 Budget for comparison purposes required interim investments in capital assets to be presented differently. Total capital investments funded remain consistent since school board acquisitions funded by the Province are part of Net Loans/Investments.
• Note: Numbers may not add due to rounding.

The interim total long-term public borrowing for 2008–09 is $28.7 billion. Key contributors to the increase in the total long-term public borrowing requirement include the projected deficit and non-cash adjustments.

The restructuring of the frozen Canadian asset-backed commercial paper (ABCP) market was completed in January 2009. Under the agreement, the Province, along with the federal government, Alberta and Quebec, provided assistance to the ABCP restructuring efforts through a Senior Funding Facility (SFF). Ontario's contribution to the SFF is the smallest, with an allocation of $250 million. The contribution of the government of Alberta is $300 million, and Quebec and the federal government each contributed $1.3 billion. No fiscal impact is expected from the SFF as it is in the form of an indemnity, which is not expected to be called upon.

The Province received $636.8 million in restructured notes due to its holdings of third-party ABCP. The Province plans to hold the notes to maturity. By holding the notes to maturity, it is expected that the Province will recover most of the accounting writedown taken last year.

While no significant further writedown is expected, the Province — with the assistance of external accounting advisers — will review the accounting treatment of third-party ABCP for the Public Accounts of Ontario.

Table 2
Medium-Term Borrowing Outlook: Province and Ontario Electricity Financial Corporation
($ Billions)

	2009–10	2010–11	2011–12
Deficit	14.1	12.2	9.7
Non-Cash Adjustments	(2.0)	(2.5)	(3.0)
Investment in Capital Assets	9.5	11.4	10.4
Net Loans/Investments	1.9	0.0	0.0
Debt Maturities:
Currently Outstanding	14.6	15.7	13.9
Incremental Impact of Future Financing	0.0	0.0	2.8
Debt Redemptions	0.4	0.4	0.4
Total Funding Requirement	38.5	37.3	34.1
Canada Pension Plan Borrowing	(0.7)	0.0	(1.0)
Decrease/(Increase) in Short-Term Borrowing	(3.0)	(1.0)	0.0
Increase/(Decrease) in Cash and Cash Equivalents	0.0	(2.0)	(1.0)
Total Long-Term Public Borrowing Requirement	34.8	34.3	32.1

• Note: Numbers may not add due to rounding.

To meet additional borrowing requirements for 2009–10 as a result of the deficit and increased investments in capital assets, Ontario will maintain a flexible approach and remain responsive to investor preferences as it monitors both domestic and international opportunities. Diversification of borrowing sources will be a primary objective in 2009–10. Depending on market conditions, the Province plans to borrow 35 per cent to 50 per cent in the international markets.

The government will seek approval from the legislature for additional borrowing authority to meet the Province's requirements and to increase short-term borrowing, while maintaining a prudent and flexible approach in the capital markets.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $177.3 billion as at March 31, 2009, compared to $162.2 billion as at March 31, 2008. Ontario's net debt, the difference between total liabilities and total financial assets, is projected to be $149.4 billion as at March 31, 2009, compared to $142.4 billion as at March 31, 2008.

Interim 2008–09 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of almost $1.0 billion, reducing the Corporation's unfunded liability (or “stranded debt of the electricity sector”) from $17.2 billion as at March 31, 2008 to $16.3 billion as at March 31, 2009. Projected 2009–10 OEFC results are an excess of revenue over expense of about $1.2 billion, reducing the unfunded liability to $15.1 billion at March 31, 2010.

Total Debt Composition

Total debt is composed of bonds issued in the public capital markets, non-public debt, treasury bills and U.S. commercial paper.

Public debt totals $158.7 billion, primarily consisting of bonds issued in the domestic and international markets in 11 currencies. Ontario also has $18.6 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Debt-to-GDP Ratios

The Province's debt-to-GDP ratios are expected to increase over the next three years, reflecting investments to preserve and create jobs, as well as investments in key priority areas.

The net debt-to-GDP ratio is expected to increase more rapidly than accumulated deficit-to-GDP because net debt-to-GDP includes the Province's significant investments in capital.

The ratios stabilize and begin to decline during the period of the recovery plan to balance the budget.

Comparative Debt Ratios

In 2007–08, the most recent year for which data is available for all jurisdictions, Ontario's net debt-to-GDP level was below the median for the provinces.

In 2008–09, Canada and Ontario's combined net debt-to-GDP was below the average compared to G7 countries.

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 5.19 per cent as at March 31, 2009 (March 31, 2008, 5.76 per cent). For comparison, as at March 31, 1993, the effective interest rate on total debt was 10.14 per cent.

The effective interest rate on public debt is estimated to be 4.86 per cent as at March 31, 2009 (March 31, 2008, 5.35 per cent). The effective interest rate on non-public debt is estimated to be 8.05 per cent as at March 31, 2009 (March 31, 2008, 8.59 per cent).

Risk Exposure

The Province limits itself to a maximum net 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. As at February 28, 2009, the net interest-rate resetting exposure was 13.4 per cent and foreign-exchange exposure was 0.2 per cent. All exposures remained well below policy limits in 2008–09.

Consolidated Financial Tables

Table 3
Net Debt and Accumulated Deficit
Interim 2009 ($ Millions)

	2004–05	2005–06	2006–07	2007–08	Interim 2008–09	Plan 2009–10
Debt1
Publicly Held Debt
Bonds2	125,279	123,129	128,666	134,362	145,663	168,361
Treasury Bills	3,747	5,215	4,249	5,092	9,430	12,465
U.S. Commercial Paper2	269	706	254	644	1,809	1,809
Ontario Infrastructure Projects Corporation (OIPC)3	1,288	1,323	1,262	1,632	1,700	1,996
Other	404	387	–	–	–	–
	130,987	130,760	134,431	141,730	158,602	184,631
Non-Public Debt
Canada Pension Plan Investment Board	10,233	10,233	10,233	10,233	10,233	9,797
Ontario Teachers' Pension Fund	8,666	7,596	6,411	4,466	3,001	1,765
Public Service Pension Fund	2,886	2,705	2,502	2,260	1,991	1,713
Ontario Public Service Employees' Union Pension Fund (OPSEU)	1,371	1,285	1,188	1,074	946	814
Canada Mortgage and Housing Corporation	1,003	960	914	863	810	754
Other4	1,231	1,367	1,314	1,430	1,642	1,469
	25,390	24,146	22,562	20,326	18,623	16,312
	156,377	154,906	156,993	162,056	177,225	200,943
Unrealized Foreign Exchange Gains	424	426	318	161	77	47
Total Debt	156,801	155,332	157,311	162,217	177,302	200,990
Cash and Temporary Investments5	(13,422)	(6,258)	(6,622)	(7,124)	(9,929)	(9,929)
Other Net (Assets)/Liabilities6	(1,193)	(5,824)	(8,493)	(11,230)	(16,505)	(19,226)
OIPC Net (Assets)/Other Liabilities3	(1,265)	(1,322)	(1,096)	(1,445)	(1,511)	(2,005)
Net Debt	140,921	141,928	141,100	142,418	149,357	169,830
Non-Financial Assets7	(15,178)	(32,773)	(34,324)	(36,801)	(39,850)	(46,223)
Accumulated Deficit8	125,743	109,155	106,776	105,617	109,507	123,607

• 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 2008–09 debt is composed of Infrastructure Renewal Bonds ($1.25 billion) and short-term commercial paper ($450 million). OIPC's debt is not guaranteed by the Province. OIPC Net (Assets)/Other 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 Cash and Temporary Investments excludes OIPC cash and temporary investments, which are reported separately under OIPC Net (Assets)/Other Liabilities.
• ⁶ 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.
• ⁷ 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.
• ⁸ 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 2009
($ Millions)

	Currency
	Canadian Dollar	U.S. Dollar	Japanese Yen	Euro1	Other Currencies2	Interim 2008–09 Total	2007–08 Total
Fiscal Year Payable
Year 1	19,010	3,443	747	1,490	870	25,560	27,035
Year 2	12,612	3,519	–	–	252	16,383	13,696
Year 3	8,770	4,924	–	–	47	13,741	11,038
Year 4	7,886	3,530	–	–	550	11,966	7,352
Year 5	12,830	1,010	182	2,404	554	16,980	11,317
1–5 years	61,108	16,426	929	3,894	2,273	84,630	70,438
6–10 years	19,495	4,957	161	385	2,302	27,300	30,670
11–15 years	11,097	–	–	–	–	11,097	9,037
16–20 years	16,658	–	–	–	–	16,658	14,710
21–25 years	8,819	–	–	–	–	8,819	13,469
26–46 years3	28,721	–	–	–	–	28,721	23,732
Unamortized Foreign Exchange Gains	–	84	–	–	(7)	77	161
Total4	145,898	21,467	1,090	4,279	4,568	177,302	162,217
Debt Issued for Provincial Purposes	121,065	19,738	1,090	4,100	3,230	149,223	133,880
OEFC Debt	24,833	1,729	–	179	1,338	28,079	28,337
Total5	145,898	21,467	1,090	4,279	4,568	177,302	162,217

• ¹ Euro includes debt issued in euros and French franc legacy currency.
• ² Other currencies comprise Australian dollar, New Zealand dollar, U.K. sterling, Swiss franc, Hong Kong dollar, South African rand and New Turkish lira.
• ³ The longest term to maturity is to June 2, 2054.
• ⁴ Total foreign currency denominated debt (before unrealized foreign exchange gains) as at March 31, 2009, is projected to be $31.4 billion (2008, $24.7 billion). Of that, $31.0 billion or 99.0 per cent (2008, $23.9 billion or 96.8 per cent) was fully hedged to Canadian dollars.
• ⁵ Total debt includes issues totalling $2.4 billion (2008, $2.7 billion) that have embedded options exercisable by either the Province or the bondholder under specific conditions.

Table 5
Medium-Term Outlook
Net Debt and Accumulated Deficit
($ Billions)

	2010–11	2011–12
Total Debt	220.3	236.6
Cash and Temporary Investments	(7.9)	(6.9)
Other Net (Assets)/Liabilities	(20.6)	(21.6)
OIPC Net (Assets)/Liabilities	(2.3)	(2.6)
Net Debt	189.5	205.4
Non-Financial Assets	(53.7)	(59.9)
Accumulated Deficit	135.8	145.5

• Note: Numbers may not add due to rounding.

Table 6
Derivative Portfolio Notional Value
Interim 2009
($ Millions)

Maturity in Fiscal Year	2009–10	2010–11	2011–12	2012–13	2013–14	6–10 Years	Over 10 Years	Interim 2008–09 Total	2007–08 Total
Swaps:
Interest rate	9,529	9,200	11,144	8,347	5,838	22,997	6,651	73,706	61,028
Cross currency	5,380	3,194	3,097	3,791	6,423	10,485	–	32,370	27,032
Forward foreign exchange contracts	7,665	–	–	–	–	–	–	7,665	2,649
Caps and floors	88	–	–	–	–	–	–	88	88
Total	22,662	12,394	14,241	12,138	12,261	33,482	6,651	113,829	90,797

The table above presents the maturity schedule of the Province's derivatives, by type, interim at March 31, 2009, based on the notional amounts of the contracts. Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows. The Province uses derivatives to hedge and to minimize interest costs. Hedges are created primarily through swaps. Swaps allow the Province to offset existing obligations, effectively converting them into obligations with more desirable characteristics.