2014 Ontario Economic Outlook and Fiscal Review
Chapter VI: Borrowing and Debt Management

Long-Term Public Borrowing and Green Bonds

The forecast long-term public borrowing requirement for 2014–15 remains at $35.0 billion, as forecast in the 2014 Budget. To date in 2014–15, $24.7 billion, or 71 per cent, of this year’s long-term public borrowing requirement has been completed. This figure includes Ontario Savings Bond sales of $553 million and a $500 million Green Bond issue.

The weighted-average term to maturity of long-term provincial debt issued so far in 2014–15 is 13.4 years, compared to 13.6 years for 2013–14 and 12.4 years for 2012–13. The term of debt may be extended or shortened depending on the future direction of interest rates and the term preference of investors.

In the 2013 Ontario Economic Outlook and Fiscal Review, the Minister of Finance announced that Ontario intended to be the first province in Canada to issue Green Bonds.

On October 2, 2014, Ontario successfully launched a Green Bond program, with an inaugural global Canadian dollar bond of $500 million. There was strong demand for Ontario’s first Green Bond issue, with orders approaching $2.4 billion. Green investors in Canada as well as in the United States, Europe and Asia participated in the deal, bringing new international buyers to the Canadian dollar market.

As the first Canadian province to issue Green Bonds, Ontario is leading the way to establish and develop a Canadian dollar Green Bond market with investor participation from around the world.

Green Bonds will be an important tool to help Ontario finance transit and other environmentally friendly projects across the province. The Eglinton Crosstown Light Rail Transit (LRT) was selected as the first green project to be funded through Ontario’s inaugural Green Bond issue.

Ontario has issued $18.3 billion in long-term debt, or 74 per cent of total borrowing completed this fiscal year, in Canadian dollars. The Province expects to end the year with at least 70 per cent of its borrowing in Canadian dollars, as set out in the 2014 Budget. Canadian dollar borrowing has been completed through:

  • syndicated issues;
  • floating rate notes;
  • Ontario Savings Bonds; and
  • a Green Bond issue.

About $6.5 billion, or 26 per cent, of borrowing has been completed in foreign currencies. The U.S. dollar market has remained an important source of funding for Ontario this year, with $3.3 billion issued in U.S. dollars. The remaining foreign currency borrowing was completed in euros and Australian dollars. This is the first time the Province has issued in these markets since 2010 and 2011, respectively.

TABLE 6.1 2014–15 Borrowing Plan
($ Billions)
  Budget Plan Current Outlook In-Year Change
Deficit/(Surplus) 12.5 12.5 0.0
Investment in Capital Assets 10.2 10.2
Non-Cash Adjustments (4.5) (4.2) 0.3
Loans to Infrastructure Ontario 1.8 1.8
Other Net Loans/Investments (0.5) (0.4) 0.0
Debt Maturities 21.7 21.7 0.0
Debt Redemptions 0.3 0.2 (0.1)
Total Funding Requirement 41.5 41.8 0.3
Canada Pension Plan Borrowing
Decrease/(Increase) in Short-Term Borrowing (2.4) (2.4)
Increase/(Decrease) in Cash and Cash Equivalents (1.4) (1.7) (0.3)
Preborrowing (2.6) (2.6)
Total Long-Term Public Borrowing Requirement 35.0 35.0 (0.0)
Note: Numbers may not add due to rounding.

Long-term public borrowing in 2014–15 will remain at $35.0 billion as forecast in the 2014 Budget.

The interest on debt (IOD) expense for 2014–15 is forecast at $10,794 million, $216 million lower than forecast in the 2014 Budget, primarily as a result of lower-than-forecast interest rates and a one-time gain from the sale of asset-backed commercial paper (ABCP) that was written down in prior fiscal years.

The credit ratings of debt issued in the capital markets affect the cost of borrowing. The government will continue to manage program spending growth responsibly to support the reduction in Ontario’s net debt-to-GDP ratio to the pre-recession level of 27 per cent. This will help keep IOD at a manageable level and protect future generations from rising interest costs, which could otherwise crowd out spending on government priorities.

TABLE 6.2 Medium-Term Borrowing Outlook
($ Billions)
  2014–15 2015–16 2016–17
Deficit/(Surplus) 12.5 8.9 5.3
Investment in Capital Assets 10.2 10.3 10.2
Non-Cash Adjustments (4.2) (4.9) (5.1)
Loans to Infrastructure Ontario 1.8 1.4 0.8
Other Net Loans/Investments (0.4) 1.1 0.2
Debt Maturities 21.7 20.5 21.2
Debt Redemptions 0.2 0.2 0.2
Total Funding Requirement 41.8 37.5 32.8
Canada Pension Plan Borrowing (0.0) (0.1)
Decrease/(Increase) in Short-Term Borrowing (2.4)
Increase/(Decrease) in Cash and Cash Equivalents (1.7)
Preborrowing (2.6)
Total Long-Term Public Borrowing 35.0 37.4 32.7
Note: Numbers may not add due to rounding.

The total long-term public borrowing requirement over the 2014–17 period has been reduced by $0.3 billion compared to the 2014 Budget.

Debt and Net Debt-to-GDP

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $310.5 billion as at March 31, 2015, compared to $295.8 billion as at March 31, 2014.

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $287.3 billion as at March 31, 2015, $2.0 billion lower than forecast in the 2014 Budget. Net debt was $267.2 billion as at March 31, 2014. Accumulated deficit is projected to be $189.1 billion as at March 31, 2015, compared to $189.8 billion forecast in the 2014 Budget. The projected difference of $98.1 billion between net debt and accumulated deficit is due to net investments in capital assets.

The Province’s net debt-to-GDP ratio is expected to peak in 2015–16 at 40.4 per cent, compared to the forecast peak of 40.8 per cent in the 2014 Budget, 40.4 per cent in the 2013 Budget and 41.3 per cent in the 2012 Budget.

Residual Stranded Debt Update

The 2014 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $1.5 billion, reducing the OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $11.3 billion as at March 31, 2013, to $9.8 billion as at March 31, 2014.

In accordance with Ontario Regulation 89/12, the Minister of Finance has determined the residual stranded debt to be $2.6 billion as at March 31, 2014. This is a decrease of $1.3 billion compared to residual stranded debt of $3.9 billion as at March 31, 2013, and a decrease of $9.3 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

The residual stranded debt determination as at March 31, 2014, is based on a stranded debt amount of $9.8 billion, reduced by the estimated present value of future dedicated revenues to OEFC of $7.2 billion. This results in the calculated $2.6 billion of residual stranded debt as at March 31, 2014.

The Auditor General audits OEFC’s annual financial statements and has provided an unqualified opinion every year since the initial 1999–2000 financial statements.

As confirmed in the Auditor General’s 2011 Annual Report, the Debt Retirement Charge (DRC) is used exclusively by OEFC to meet its mandate, as provided for under the Electricity Act, 1998, which includes servicing and retiring its debt and other liabilities.

The Auditor General’s 2012 and 2013 Annual Reports also noted that the Auditor was pleased to see an increased level of transparency with respect to public reporting on the residual stranded debt.

The Electricity Act, 1998, allows for the DRC to be paid until the residual stranded debt is retired. The government is moving forward with removing the DRC cost from residential users’ electricity bills after December 31, 2015, once the Ontario Clean Energy Benefit ends. This will save a typical residential ratepayer about $70 per year. The DRC is to remain on all other electricity users’ bills until the residual stranded debt is retired — it is estimated this will occur by the end of 2018, consistent with the estimate in the 2014 Budget.

The estimated timing for residual stranded debt retirement is subject to uncertainty in forecasting future OEFC results and dedicated revenues to OEFC, which depend on the financial performance of Ontario Power Generation, Hydro One and municipal electricity utilities, as well as other factors such as interest rates and electricity consumption.

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, as at September 30, 2014, totalled $291.9 billion, primarily consisting of bonds issued in the domestic and international public markets in 10 currencies. Ontario also has $12.5 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued mainly to the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Canadian dollar issuance accounts for 77 per cent of Ontario’s total debt composition. While foreign currency issuance accounts for 23 per cent, foreign exchange exposure was only 0.3 per cent as at September 30, 2014.

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt was 3.9 per cent as at September 30, 2014, unchanged from March 31, 2014.

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 September 30, 2014, the net interest rate resetting exposure was 11.8 per cent and foreign exchange exposure was 0.3 per cent.

Chart 6.1: 2014–15 Borrowing

To date, the Province’s 2014–15 borrowing program totalled $24.7 billion, and consisted of $15.3 billion of domestic syndicated bonds, $1.9 billion of domestic floating rate notes, $0.6 billion of Ontario Savings Bonds, $3.6 billion of U.S. dollar global bonds, $2.6 billion of a European medium-term note, $0.3 billion of Australian Kangaroo Bonds and a $0.5 billion Green Bond issue.

Return to Chart 6.1

Chart 6.2: Net Debt-to-GDP

Net debt-to-GDP ratio is projected to be 39.9 per cent for 2014–15. The net debt-to-GDP is projected to peak at 40.4 per cent in 2015–16.

Return to Chart 6.2

Chart 6.3: Residual Stranded Debt since April 1, 1999

As at March 31, 2014, as determined by the Minister of Finance, the residual stranded debt was $2.6 billion, a decrease of $1.3 billion compared to residual stranded debt of $3.9 billion as at March 31, 2013. This is also a total estimated decrease of $9.3 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

Return to Chart 6.3

Chart 6.4: Total Debt Composition as at September 30, 2014

As at September 30, 2014, the Province’s total debt was $304.4 billion, and consisted of $206.3 billion of domestic bonds, $12.5 billion of non-public debt, $12.9 billion of treasury bills, $8.7 billion of U.S. commercial paper, and $64.0 billion of international bonds.

Return to Chart 6.4

Chart 6.5: Effective Interest Rate (Weighted Average) on Total Debt

The effective interest rate (calculated as a weighted average) on total debt was 3.9 per cent as at September 30, 2014. This compares with 3.9 per cent in 2013–14 and 4.1 per cent in 2012–13. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

Return to Chart 6.5

Chart 6.6: Net Interest Rate Resetting & Foreign Exchange Exposure (As a Percentage of Debt Issued for Provincial Purposes)

The Province’s net interest rate exposure, calculated as a percentage of the debt issued for Provincial purposes, was 11.8 per cent on September 30, 2014. This compares to 11.0 per cent as at March 31, 2014, and 8.9 per cent as at March 31, 2013. The interest rate exposure limit is set at 35 per cent and excludes OEFC debt. The Province’s foreign exchange exposure, calculated as a percentage of the debt issued for Provincial purposes, was 0.3 per cent as at September 30, 2014. This compares to 0.4 per cent as at March 31, 2014, and 0.8 per cent as at March 31, 2013. The foreign exchange exposure limit is set at 5 per cent and also excludes OEFC debt.

Return to Chart 6.6