2012 Ontario Budget: Chapter V: Borrowing and Debt Management

Highlights

  • The total funding requirement for 2011–12 has declined by $2.2 billion from the 2011 Budget, primarily due to the lower deficit forecast for 2011–12 and the lower final deficit in 2010–11.
  • The forecast for long-term public borrowing for 2012–13 is $35.6 billion, down by $3.0 billion from the forecast for 2012–13 in the 2011 Budget.
  • Interest on debt (IOD) expense in 2011–12 is projected to be $193 million lower than forecast in the 2011 Budget. This reduction in IOD primarily reflects the impact of lower-than-forecast interest rates together with lower deficits for 2010–11 and 2011–12.
  • Total debt is projected to be $257.5 billion as at March 31, 2012, lower than the forecast of $257.9 billion in the 2011 Budget.
  • Net debt is projected to be $237.6 billion as at March 31, 2012, down from a forecast of $241.5 billion in the 2011 Budget.
  • For 2012–13, the impact of a one percentage point change in interest rates would be a change in interest on debt of approximately $467 million for the Province.

Long-Term Public Borrowing

Ontario successfully completed its annual borrowing program in 2011–12, despite continuing challenges in global financial markets. Going forward, the Province’s long-term public borrowing for 2012–13 has declined by $3.0 billion since the 2011 Budget.

Strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province have allowed Ontario to borrow 81 per cent in the Canadian-dollar market in 2011–12, up from 59 per cent in 2010–11 and well above the target of at least 60 per cent set out in the 2011 Budget.

In 2012–13, the Province plans to borrow at least 70 per cent in the Canadian-dollar market. This is in line with the historical average of issuing approximately three-quarters in that market, but represents a considerable decline in the reliance on foreign markets during the financial crisis. In 2009–10, more than 50 per cent of the Province’s issuance was in international markets.

The weighted-average term to maturity of long-term Provincial debt issued has been extended significantly over the past two years. In 2011–12, it was 13.0 years, slightly longer than 12.8 years for 2010–11, and much longer than 8.1 years for 2009–10. This continuation of the extension of the term to maturity 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.

Chart 5.1:	Pie Chart: Borrowing - Canadian-dollar Market

Canadian-dollar borrowing has been completed primarily through 31 syndicated issues, but has also included floating rate notes and Ontario Savings Bonds.

In 2011–12, 19 per cent ($6.5 billion) was borrowed in international capital markets in three foreign currencies. Bonds issued in foreign currencies were:

  • global bonds and medium-term floating rate notes in U.S. dollars;
  • Euro Medium-Term Notes (EMTNs) in Norwegian kroner; and
  • a Kangaroo bond in Australian dollars.
Chart 5.2: Pie Chart: 2011 - 2012 Borrowing - International Markets

Table 5.1 2011–12 Borrowing Program: Province and Ontario Electricity Financial Corporation
($ Billions)
  2011
Budget
Interim In-Year
Change
Deficit 16.3 15.3 (1.0)
Investment in Capital Assets 10.9 10.5 (0.4)
Non-Cash Adjustments (3.6) (2.9) 0.7
Net Loans/Investments 2.7 1.7 (1.0)
Debt Maturities 13.9 13.7 (0.2)
Debt Redemptions 0.5 0.3 (0.2)
Total Funding Requirement 40.7 38.5 (2.2)
Canada Pension Plan Borrowing (1.1) (1.1)
Decrease/(Increase) in Short-Term Borrowing 0.7 0.7
Increase/(Decrease) in Cash and Cash Equivalents (4.6) (6.4) (1.8)
Debt Buy-Backs 3.2 3.2
Total Long-Term Public Borrowing 35.0 34.9 (0.1)

Note: Numbers may not add due to rounding.

In total, the final deficit for 2010–11 and interim deficit for 2011–12 have declined by $3.7 billion from the forecast in the 2011 Budget. Interim net debt for 2011–12 is now forecast at $237.6 billion, down $3.9 billion from the forecast in the 2011 Budget.

IOD expense for 2011–12, at $10,097 million, is $193 million lower than forecast in the 2011 Budget.

The debt buy-backs outlined in the 2011 Ontario Economic Outlook and Fiscal Review will be completed and will reduce long-term public borrowing and refinancing risk by $3.2 billion over the next two fiscal years.

Table 5.2 Medium-Term Borrowing Outlook:
Province and Ontario Electricity Financial Corporation
($ Billions)
  2012–13 2013–14 2014–15
Deficit 15.2 13.3 10.7
Investment in Capital Assets 10.5 10.5 9.3
Non-Cash Adjustments (3.8) (4.0) (3.6)
Net Loans/Investments 1.1 1.6 0.8
Debt Maturities 17.3 23.7 21.8
Debt Redemptions 0.3 0.3 0.3
Total Funding Requirement 40.5 45.4 39.4
Canada Pension Plan Borrowing (0.8)
Decrease/(Increase) in Short-Term Borrowing (3.0) (3.0)
Increase/(Decrease) in Cash and Cash Equivalents (0.7) (0.7)
Debt Buy-Backs (1.2) (2.0)
Total Long-Term Public Borrowing 35.6 39.6 38.7

Note: Numbers may not add due to rounding.

The Province began 2011–12 with higher cash reserves than forecast in the 2011 Budget because of the lower deficit reported in the 2010–11 Public Accounts. This, combined with the lower forecast deficit in 2011–12, allowed the Province to reduce the planned borrowing program in 2012–13 and 2013–14 by a cumulative $5.6 billion, while taking advantage of historically low interest rates and continued demand for Ontario long-term debt in 2011–12.

The 2012–13 total funding requirement is primarily the result of the deficit, investment in capital assets and refinancing of debt maturities. This funding requirement and the borrowing program are lower than forecast in the 2011 Budget, but are slightly higher than in 2011–12 mainly because debt maturities that have to be refinanced rise from $13.7 billion in 2011–12 to $17.3 billion in 2012–13.

To meet the funding requirement, Ontario will continue to be flexible, monitoring Canadian-dollar and international markets, issuing bonds in different terms and currencies, and responding to investor preferences.

The government will seek approval from the legislature for borrowing authority to meet the Province’s requirement.

The Province uses derivatives to reduce risk by hedging to minimize foreign exchange and interest costs when borrowing in international markets. This hedging process will become more complex due to the Dodd-Frank bill and Basel III regulations. Initiatives that assist regulators in ensuring the future stability of capital markets are welcome. However, it must be recognized that these initiatives may increase the cost of hedging through substantially higher capital charges and transaction costs. Derivatives trading liquidity will likely decline as well, making it more challenging to hedge the Province’s large global bond issues.

The Volcker Rule, a section of the Dodd-Frank bill, is intended to reduce systemic risk, with its focus on restricting banking entities from engaging in proprietary trading. In its current draft form, the Volcker Rule provides an exemption for proprietary trading in U.S. government bonds but contains no exemption for foreign government bonds. A major concern for Ontario and all other Canadian governments is that, without this exemption being extended to Canadian government bonds, Ontario’s market could see substantially reduced liquidity. This could increase the future cost of borrowing and hedging. Ontario, the federal government, the Bank of Canada and other provinces have expressed their concerns to the relevant U.S. regulatory bodies, but the outcome is uncertain at this time.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $257.5 billion as at March 31, 2012, compared to $236.6 billion as at March 31, 2011, and a forecast of $257.9 billion in the 2011 Budget.

Ontario’s net debt is the difference between total liabilities and total financial assets. Ontario’s net debt is projected to be $237.6 billion as at March 31, 2012 (March 31, 2011, $214.5 billion). This projection for March 31, 2012 is $3.9 billion below the forecast of $241.5 billion in the 2011 Budget. It includes the broader public sector’s (BPS) net debt of $14.8 billion (March 31, 2011, $13.6 billion).

Residual Stranded Debt Update

Interim 2011–12 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of about $1.2 billion, reducing the corporation’s unfunded liability from $13.4 billion as at March 31, 2011 to $12.3 billion as at March 31, 2012. Projected 2012–13 OEFC results are an excess of revenue over expense of about $0.9 billion, which would reduce the unfunded liability to $11.4 billion as at March 31, 2013.

In accordance with a regulation proposed to be made under the Electricity Act, 1998, residual stranded debt is estimated to be $5.8 billion as at March 31, 2011. This is a decrease of about $6.1 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004. Based on interim actual results for 2011–12, and projected future dedicated revenues to OEFC, the residual stranded debt is estimated to be $4.5 billion as at March 31, 2012. Residual stranded debt is estimated to further decline to $3.6 billion as at March 31, 2013.

Chart 5.3: Pie Chart: Residual Stranded Debt and OEFC Unfunded Liability Since April 1, 1999

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, 2012, totals $242.5 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $15.0 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 5.4: Pie Chart: Total Debt Composition

Debt-to-GDP Ratios

The Province’s net debt-to-GDP ratio is forecast to be 37.2 per cent at the end of fiscal 2011–12, below the forecast of 37.6 per cent projected in the 2011 Budget. This ratio is expected to peak at 41.6 per cent in 2014–15, higher than the 40.6 per cent projected in the 2011 Budget and the 41.3 per cent in the 2011 Ontario Economic Outlook and Fiscal Review, but lower than the 41.8 per cent projected in the 2010 Budget. While net debt is forecast to be lower in the peak year of 2014–15 than projected in the 2011 Budget, the increase in this ratio above the 2011 Budget results from a lower nominal GDP forecast.

Chart 5.5: Line Graph: Net Debt-to-GDP

Chart 5.6: Line Graph: Accumulated Deficit-to-GDP

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.35 per cent as at March 31, 2012 (March 31, 2011, 4.54 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.92 per cent.

For 2012–13, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $467 million for the Province.

Chart 5.7: 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 29, 2012, the net interest rate resetting exposure was 9.6 per cent and foreign exchange exposure was 1.0 per cent. All exposures remained well below policy limits in 2011–12.

Chart 5.8: Bar Graph: Net Interest Rate Resetting Exposure

Chart 5.9: Bar Graph: Foreign Exchange Exposure

Consolidated Financial Tables


Table 5.3
Net Debt and Accumulated Deficit Interim 2012
($ Millions)
  2007–08 2008–09 2009–10 2010–11 Interim
2011–12
Plan
2012–13
Debt1
Publicly Held Debt
   Bonds2 134,523 145,488 175,899 200,074 223,701 243,930
   Treasury Bills 5,092 9,044 13,914 14,925 12,140 15,136
   U.S. Commercial Paper2 644 2,006 3,087 3,242 4,336 4,336
   Infrastructure Ontario (IO)3 1,632 1,695 1,920 1,989 1,985 1,985
   Other 68 296 353 347 341
  141,891 158,301 195,116 220,583 242,509 265,728
Non-Public Debt            
   Canada Pension Plan Investment Fund 10,233 10,233 10,233 10,233 10,233 10,233
   Ontario Teachers' Pension Fund 4,466 3,001 1,765 1,205 625 0
   Public Service Pension Fund 2,260 1,991 1,713 1,403 1,048 656
   Ontario Public Service Employees' Union Pension Fund (OPSEU) 1,074 946 814 667 497 311
   Canada Mortgage and Housing Corporation 863 811 755 696 635 570
   Other4 1,430 1,632 1,726 1,842 1,927 1,665
  20,326 18,614 17,006 16,046 14,965 13,435
             
Total Debt 162,217 176,915 212,122 236,629 257,474 279,163
Cash and Temporary Investments (8,144) (11,878) (17,102) (22,416) (19,167) (17,967)
Total Debt Net of Cash and Temporary Investments 154,073 165,037 195,020 214,213 238,307 261,196
Other Net (Assets)/Liabilities5 (9,697) (8,948) (15,598) (13,261) (15,542) (15,423)
Broader Public Sector
(BPS) Net Debt
12,240 13,496 14,167 13,559 14,818 14,638
Net Debt 156,616 169,585 193,589 214,511 237,583 260,411
Non-Financial Assets6 (50,999) (56,347) (62,632) (69,938) (77,727) (85,402)
Accumulated Deficit 105,617 113,238 130,957 144,573 159,856 175,009

1 Includes debt issued by the Province and Government Organizations, including 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 2011–12 debt is composed of Infrastructure Renewal Bonds ($1,250 million) and short-term commercial paper ($735 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 broader public sector.
Source: Ontario Ministry of Finance.


Table 5.4 Medium-Term Outlook: Net Debt and Accumulated Deficit
($ Billions)
  2013–14 2014–15
Total Debt 297.5 314.1
Cash and Temporary Investments (15.3) (14.6)
Total Debt Net of Cash and Temporary Investments 282.3 299.6
Other Net (Assets)/Liabilities (16.0) (15.9)
Broader Public Sector (BPS) Net Debt 14.8 13.6
Net Debt 281.0 297.3
Non-Financial Assets (92.7) (98.2)
Accumulated Deficit 188.3 199.1

Note: Numbers may not add due to rounding.


Table 5.5 Debt Maturity Schedule: Interim 2012
($ Millions)
Currency
  Canadian
Dollar
U.S.
Dollar
Japanese
Yen
Euro Other
Currencies1
Interim
2011–12
Total
2010–11
Total
Fiscal Year Payable 
Year 1 20,303 13,786 550 34,639 31,399
Year 2 14,856 5,004 184 2,354 1,621 24,019 17,314
Year 3 11,749 9,060 66 774 21,649 24,440
Year 4 8,442 5,334 1,260 1,798 16,834 21,582
Year 5 11,154 7,154 0 502 18,810 16,397
1–5 years 66,504 40,338 1,510 2,354 5,245 115,951 111,132
6–10 years 37,302 6,434 562 6,699 2,026 53,023 46,384
11–15 years 17,033 17,033 13,571
16–20 years 14,200 14,200 12,749
21–25 years 17,139 17,139 17,577
26–45 years2 40,128 40,128 35,216
Total3 192,306 46,772 2,072 9,053 7,271 257,474 236,629
Debt Issued for Provincial Purposes 169,161 44,348 2,072 8,874 6,084 230,539 209,443
OEFC Debt 23,145 2,424 179 1,187 26,935 27,186
Total 192,306 46,772 2,072 9,053 7,271 257,474 236,629

1 Other currencies include Australian dollar, New Zealand dollar, Norwegian kroner, 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 as at March 31, 2012, is projected to be $65.3 billion (2011, $61.6 billion). Of that, $62.7 billion or 96.2 per cent (2011, $59.4 billion or 96.4 per cent) was fully hedged to Canadian dollars.


Table 5.6 Derivative Portfolio Notional Value: Interim 2012
($ Millions)
Maturity in
Fiscal Year
2012–13 2013–14 2014–15 2015–16 2016–17 6–10
Years
Over
10 Years
Interim
2011–12
Total
2010–11
T otal
Swaps:
   Interest rate1 18,528 10,796 24,092 13,332 17,681 21,713 6,956 113,098 103,164
   Cross currency 12,066 10,623 9,645 7,632 7,567 18,867 66,400 62,960
Forward foreign exchange contracts 9,942 9,942 9,558
Swaptions2 100 150 500 750 993
Total 40,536 21,519 33,887 20,964 25,748 40,580 6,956 190,190 176,675

1 Includes $2.9 billion (2010, $2.5 billion) of interest rate swaps related to loans receivable held by consolidated entity.
2 An interest rate swap option contract.

The table above presents the maturity schedule of the Province’s derivatives by type, interim as at March 31, 2012, 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.