2010 Ontario Budget: Chapter IV: Borrowing and Debt Management

Highlights

  • The total funding requirement for 2010–11 has declined by $7.0 billion from the 2010 Budget.
  • The forecast for long-term public borrowing for 2011–12 is $35.0 billion, which is down by $4.9 billion from the $39.9 billion raised in 2010–11, and down by $3.8 billion from the forecast for 2011–12 in the 2010 Budget.
  • Interest on debt expense in 2010–11 is $434 million lower than forecast in the 2010 Budget.
  • Total debt is projected to be $236.3 billion as at March 31, 2011.
  • Net debt is projected to be $217.3 billion as at March 31, 2011.
  • For 2011–12, the impact of a one per cent increase in interest rates above forecast would increase interest on debt by approximately $500 million.

Long-Term Public Borrowing

Ontario successfully completed its annual borrowing program in 2010–11, despite continuing challenges in global financial markets. The Province’s total funding requirement for 2010–11 has declined by $7.0 billion since the 2010 Budget.

The Province took advantage of favourable market conditions and robust demand for Ontario bonds to pre-borrow for 2011–12. Ontario completed $39.9 billion in long-term public borrowing for 2010–11, an increase of $0.2 billion from the projection in the 2010 Budget in spite of the $7.0 billion lower funding requirement. This pre-borrowing, combined with a lower deficit forecast for 2010–11, will allow the Province to increase its cash reserves by $5.6 billion and reduce the Province’s short-term borrowing by $1.6 billion compared to the 2010 Budget forecast.

Ontario was able to borrow almost 59 per cent in the domestic market in 2010–11, up from 49 per cent in 2009–10. In total, Ontario borrowed approximately $23.5 billion in the domestic market in 2010–11, $2.1 billion more than in 2009–10. This increase in domestic borrowing reflects strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province of Ontario credit.

Over the past year, as domestic investors have shown a strong preference for longer-term maturities, Ontario has been able to extend the term to maturity of its debt and take advantage of the lower interest rate environment. The weighted-average term to maturity of long-term Provincial debt issued in 2010–11 was 12.8 years, longer than the weighted-average term to maturity of 8.1 years for 2009–10. This term to maturity extension allowed the Province to lock in low interest rates for a longer period, which reduces refinancing risks and helps offset the impact of expected higher interest rates on the Province’s interest on debt (IOD) costs.

Long-term public borrowing for 2011–12 is forecast at $35.0 billion, $4.9 billion lower than in 2010–11. With a smaller borrowing program and expected ongoing strong demand in the domestic market, the Province will be relying less on foreign markets to achieve its financing requirement.

About $23.5 billion, or 59 per cent, of long-term public borrowing was completed in the domestic market through a number of instruments, including:

  • syndicated issues
  • floating rate notes
  • Ontario Savings Bonds
  • medium-term notes
Chart 1:	Pie Chart: Borrowing - Domestic Market

In 2010–11, 41 per cent ($16.4 billion) was borrowed in international capital markets in a total of eight foreign currencies. Bonds issued in foreign currencies were:

  • global bonds in U.S. dollars
  • Euro Medium-Term Notes (EMTNs) in euros, Japanese yen, Norwegian kroner, U.K. pounds sterling, Swiss francs, Australian dollars and Hong Kong dollars.
Chart 2: Pie Chart: 2010 - 2011 Ontario International Borrowing

Table 1
2010–11 Borrowing Program: Province and Ontario Electricity Financial Corporation
($ Billions)
  2010 Budget Interim In-Year
Change
Deficit 19.7 16.7 (3.0)
Investment in Capital Assets 9.8 9.5 (0.2)
Non-Cash Adjustments (1.7) (5.6) (3.9)
Net Loans/Investments 1.9 1.9 (0.0)
Debt Maturities 15.6 15.6 (0.0)
Debt Redemptions 0.4 0.6 0.2
Total Funding Requirement 45.6 38.6 (7.0)
Canada Pension Plan Borrowing (0.8) (0.8) 0.0
Decrease/(Increase) in Short-Term Borrowing (1.6) 0.0 (1.6)
Increase/(Decrease) in Cash and Cash Equivalents (3.5) 2.1 5.6
Total Long-Term Public Borrowing 39.7 39.9 0.2
Note: Numbers may not add due to rounding.

The total funding requirement for 2010–11 has declined by $7.0 billion from the 2010 Budget.

Interest on debt expense, at $9,527 million, is $434 million lower than forecast in the 2010 Budget.

The $5.6 billion increase in cash and cash equivalents compared to the 2010 Budget is the result of pre-borrowing for 2011–12, as the Province took advantage of favourable market conditions in late 2010–11.

Table 2
Medium-Term Borrowing Outlook:
Province and Ontario Electricity Financial Corporation
($ Billions)
  2011–12 2012–13 2013–14
Deficit 16.3 15.2 13.3
Investment in Capital Assets 10.9 11.5 10.5
Non-Cash Adjustments (3.6) (3.4) (3.9)
Net Loans/Investments 2.7 1.2 1.1
Debt Maturities 13.9 17.4 23.7
Debt Redemptions 0.5 0.5 0.5
Total Funding Requirement 40.7 42.3 45.3
Canada Pension Plan Borrowing (1.1) (0.8) 0.0
Decrease/(Increase) in Short-Term Borrowing 0.0 (3.0) (3.0)
Increase/(Decrease) in Cash and Cash Equivalents (4.6) 0.0 0.0
Total Long-Term Public Borrowing 35.0 38.6 42.2
Note: Numbers may not add due to rounding.

The 2011–12 total funding requirement is primarily the result of the deficit, investment in capital assets and refinancing of debt maturities. To meet the funding requirement, Ontario will continue to be flexible, monitoring domestic and international markets, issuing bonds in different terms and currencies and responding to investor preferences.

The forecast for long-term public borrowing for 2011–12 is $35.0 billion, which is down by $4.9 billion from the $39.9 billion raised in 2010–11, and down by $3.8 billion from the forecast for 2011–12 borrowing in the 2010 Budget.

Diversification of borrowing sources will continue to be a primary objective in 2011–12. Depending on market conditions, the Province plans to borrow at least 60 per cent, or $21.0 billion in the domestic market. With a smaller borrowing program, the Province will be relying less on foreign markets to achieve its financing requirement. It is planning to borrow up to $14.0 billion in foreign markets, $2.4 billion less than in 2010–11.

The Province’s total long-term public borrowing has declined by a cumulative $5.4 billion over the next two fiscal years from the forecasts included in the 2010 Budget. This decline is primarily due to a decision to pre-borrow in 2010–11 and a lower deficit forecast over the next two fiscal years. The government will seek approval from the legislature for borrowing authority to meet the Province’s requirement.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $236.3 billion as at March 31, 2011, compared to $212.1 billion as at March 31, 2010.

Ontario’s net debt is the difference between total liabilities and total financial assets. Ontario’s net debt is projected to be $217.3 billion as at March 31, 2011 (March 31, 2010, $193.6 billion). This figure includes the broader public sector’s (BPS) net debt of $13.5 billion (March 31, 2010, $14.2 billion).

Interim 2010–11 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of $1.2 billion, reducing the Corporation’s unfunded liability (or “stranded debt of the electricity sector”) from $14.8 billion as at March 31, 2010 to $13.6 billion as at March 31, 2011. Projected 2011–12 OEFC results are an excess of revenue over expense of about $1.4 billion, which would reduce the unfunded liability to $12.2 billion as at March 31, 2012.

Total Debt Composition

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

Public debt, projected to March 31, 2011, totals $220.3 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $16.0 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued mainly to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Chart 3: Pie Chart: Total Debt Composition

Debt-to-GDP Ratios

The Province’s net debt-to-GDP ratio is expected to peak at 40.6 per cent in 2014–15, lower than the 41.8 per cent projected in the 2010 Budget.

Chart 4:	Line Graph: Net Debt-to-GDP

Chart 5:	Line Graph: Ney Debt-to-GDP

In 2010–11, Canada's and Ontario’s net debt-to-GDP ratios were well below those of G7 countries.

Chart 6: Bar Graph: Net Debt-to-GDP, Provincial Comparison

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.52 per cent as at March 31, 2011 (March 31, 2010, 4.58 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.92 per cent.

For 2011–12, the impact of a one percentage point increase in interest rates above forecast would increase interest on debt by approximately $500 million for the Province.

Chart 7: Line Graph: Effective Interest Rate (Weighted Average) on Total Debt

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, 2011, the net interest rate resetting exposure was 6.9 per cent and foreign exchange exposure was 1.0 per cent. All exposures remained well below policy limits in 2010–11.

Chart 8: Bar Graph: Net Interest Rate Resetting Exposure

 

Table 3
Net Debt and Accumulated Deficit
Interim 2011
($ Millions)
  2006–07 2007–08 2008–09 2009–10 Interim
2010–11
Plan
2011–12
Debt1            
Publicly Held Debt            
Bonds2 128,666 134,362 145,398 175,767 201,163 223,998
Treasury Bills 4,249 5,092 9,044 13,914 13,895 13,324
U.S. Commercial Paper2 254 644 2,006 3,087 3,088 3,659
Infrastructure Ontario (IO)3 1,262 1,632 1,695 1,920 1,949 1,949
Other 68 296 310 308
  134,431 141,730 158,211 194,984 220,405 243,238
Non-Public Debt            
Canada Pension Plan Investment Board 10,233 10,233 10,233 10,233 10,233 10,233
Ontario Teachers' Pension Fund 6,411 4,466 3,001 1,765 1,205 625
Public Service Pension Fund 2,502 2,260 1,991 1,713 1,403 1,048
Ontario Public Service Employees' Union Pension Fund (OPSEU) 1,188 1,074 946 814 666 497
Canada Mortgage and Housing Corporation 914 863 811 755 696 635
Other4 1,314 1,430 1,632 1,726 1,804 1,688
  22,562 20,326 18,614 17,006 16,007 14,726
  156,993 162,056 176,825 211,990 236,412 257,964
Unamortized Foreign Exchange Gains/(Losses) 318 161 90 132 (69) (57)
Total Debt 157,311 162,217 176,915 212,122 236,343 257,907
Cash and Temporary Investments5 (6,622) (8,144) (11,878) (17,102) (19,245) (14,621)
Total Debt Net of Cash and Temporary Investments 150,689 154,073 165,037 195,020 217,098 243,286
Other Net (Assets)/Liabilities5 (8,050) (9,697) (8,948) (15,598) (13,274) (15,986)
Broader Public Sector (BPS) Net Debt 11,103 12,240 13,496 14,167 13,523 14,172
Net Debt 153,742 156,616 169,585 193,589 217,347 241,472
Non-Financial Assets6 (46,966) (50,999) (56,347) (62,632) (69,704) (77,513)
Accumulated Deficit 106,776 105,617 113,238 130,957 147,643 163,959
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 Infrastructure Ontario's (IO) interim 2010–11 debt is composed of Infrastructure Renewal Bonds ($1,250 million) and short-term commercial paper ($699 million). IO's debt is not guaranteed by the Province.
4 Other non-public debt includes Ontario Immigrant Investor Corporation and indirect debt of school boards.
5 Other Net (Assets)/Liabilities include accounts receivable, loans receivable, investments in government business enterprises, other assets, accounts payable, accrued liabilities, deferred revenue and capital contributions, pensions and other employee future benefits, and other liabilities.
6 Non-financial assets include the tangible capital assets of the Province and BPS.
Source: Ontario Ministry of Finance.
Table 4
Medium-Term Outlook: Net Debt and Accumulated Deficit
($ Billions)
  2012–13 2013–14
Total Debt 282.3 303.0
Cash and Temporary Investments (-14.6) (-14.6)
Total Debt Net of Cash and Temporary Investments 267.7 288.4
Other Net (Assets)/Liabilities (-17.1) (-18.5)
Broader Public Sector (BPS) Net Debt 14.2 15.0
Net Debt 264.8 284.8
Non-Financial Assets (-85.7) (-92.4)
Accumulated Deficit 179.1 192.4
Note: Numbers may not add due to rounding.
Table 5
Debt Maturity Schedule Interim 2011
($ Millions)
Currency
  Canadian
Dollar
U.S.
Dollar
Japanese
Yen
Euro Other
Currencies1
Interim
2010–11
Total
2009–10
Total
Fiscal Year Payable 
Year 1 22,870 8,223 47 31,140 33,923
Year 2 7,405 9,517 550 17,472 13,476
Year 3 15,391 5,004 171 2,330 1,586 24,482 17,325
Year 4 11,741 9,060 61 720 21,582 19,333
Year 5 8,399 4,985 1,170 1,708 16,262 21,632
1–5 years 65,806 36,789 1,402 2,330 4,611 110,938 105,689
6–10 years 29,363 7,640 547 6,655 2,259 46,464 36,764
11–15 years 13,556 13,556 12,070
16–20 years 12,735 12,735 15,602
21–25 years 17,572 17,572 9,626
26–45 years2 35,147 35,147 32,239
Unamortized Foreign Exchange Gains/(Losses) 57 (105) 44 (65) (69) 132
Total3 174,179 44,486 1,844 9,029 6,805 236,343 212,122
Debt Issued for Provincial Purposes 150,812 42,005 1,844 8,850 5,630 209,141 184,684
OEFC Debt 23,367 2,481 179 1,175 27,202 27,438
Total 174,179 44,486 1,844 9,029 6,805 236,343 212,122
1Other currencies include Australian dollar, New Zealand dollar, Norwegian krona, U.K. pound sterling, Swiss franc, Hong Kong dollar and South African rand.
2 The longest term to maturity is to June 2, 2054.
3 Total foreign currency denominated debt (before unamortized foreign exchange losses) as at March 31, 2011, is projected to be $62.2 billion (2010, $48.9 billion). Of that, $59.9 billion or 96.3 per cent (2010, $48.7 billion or 99.5 per cent) was fully hedged to Canadian dollars.
Table 6
Derivative Portfolio Notional Value
Interim 2010
($ Millions)
Maturity in
Fiscal
Year
2011–12 2012–13 2013–14 2014–15 2015–16 6–10
Years
Over 10
Years
Interim
2010–11
Total
2009–10
Total
Swaps:                  
Interest rate 10,911 12,036 10,520 23,883 12,899 23,223 8,174 101,646 91,337
Cross currency 5,810 10,605 10,869 9,722 7,494 16,810 61,310 51,328
Forward foreign exchange contracts 9,775 9,775 9,379
Swaptions 43 950 993 993
Total 26,539 22,641 21,389 33,605 20,393 40,033 9,124 173,724 153,037

The table above presents the maturity schedule of the Province’s derivatives by type, interim as at March 31, 2011, 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, converting them into obligations with more desirable characteristics.