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

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.

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

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

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.

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.

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

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.

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.

 

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

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

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

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.