2013 Ontario Budget
Chapter V: Borrowing and Debt Management

Highlights

• Total long-term public borrowing for 2013–14 is forecast to be $33.4 billion, $3.2 billion lower than the amount borrowed in 2012–13.
• Also, the total borrowing requirement for 2013–14 is $7.2 billion lower than forecast in the 2012 Budget because of lower deficits. Long-term borrowing for 2013–14 has been reduced by $5.7 billion from the forecast contained in the 2012 Budget, and short-term borrowing has been reduced by $1.5 billion.
• Net debt is projected to be $252.8 billion as at March 31, 2013, lower than the $259.8 billion forecast in the 2012 Budget.
• The net debt-to-GDP ratio is projected to be 37.5 per cent at the end of fiscal 2012–13, compared to the 39.4 per cent forecast in the 2012 Budget. This ratio is expected to peak at 40.4 per cent in 2015–16, lower than the 41.3 per cent forecast in the 2012 Budget.
• After eliminating the deficit by 2017–18, overall spending increases will be restricted to one per cent below GDP growth until the Province's net debt-to-GDP ratio returns to the pre-recession level of 27 per cent.
• Interest on debt (IOD) expense is projected to be $10,372 million for 2012–13, and $10,605 million for 2013–14, which is lower than forecast in the 2012 Budget by $247 million and $610 million respectively. These reductions primarily reflect the impact of lower-than-forecast interest rates together with lower deficits.
• For 2013–14, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $408 million for the Province.

Long-Term Public Borrowing

Ontario successfully completed its annual borrowing program in 2012–13, despite continuing challenges in global financial markets. The Province borrowed $36.6 billion in 2012–13, taking advantage of the historically low interest rate environment and strong demand for Ontario bonds.

The Province's total borrowing requirement in 2013–14 has been reduced by $7.2 billion compared to the 2012 Budget forecast because of lower deficits. This reduction will impact both long-term and short-term borrowing. Long-term public borrowing in 2013–14 is now $5.7 billion lower than the forecast contained in the 2012 Budget, and short-term borrowing is forecast to be $1.5 billion lower.

Strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province allowed Ontario to borrow 72 per cent in the Canadian-dollar market in 2012–13. This is consistent with the target of at least 70 per cent set out in the 2012 Budget, down from 81 per cent in 2011–12.

In 2013–14, 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, and continues to represent a decline in the reliance on foreign markets seen during the financial crisis. In 2009–10, at the peak of the crisis, only 49 per cent of the Province's issuance was in the Canadian-dollar market.

The weighted-average term to maturity of long-term Provincial debt issued has been extended significantly over the past three years. It was 12.4 years for 2012–13, 13.0 years for 2011–12, and 12.8 years for 2010–11. This average term is much longer than the 8.1 years for 2009–10. Extending 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 IOD costs.

Canadian-dollar borrowing was completed primarily through 29 syndicated issues, but also included floating rate notes, Ontario Savings Bonds and medium-term notes.

The U.S. dollar market remained an important source of funding for Ontario. About $10.2 billion, or 28 per cent, of borrowing was completed through global bonds and medium-term floating rate notes (MTNs) in U.S. dollars.

TABLE 5.1 2012–13 Borrowing Program: Province and Ontario Electricity Financial Corporation
($ Billions)

	2012 Budget1	Interim	In-Year Change
Deficit	14.8	9.8	(5.0)
Investment in Capital Assets	10.5	9.6	(0.9)
Non-Cash Adjustments	(3.8)	(1.8)	2.1
Net Loans/Investments	1.1	0.9	(0.2)
Debt Maturities	17.3	17.3	–
Debt Redemptions	0.3	0.2	(0.1)
Total Funding Requirement	40.2	36.0	(4.2)
Canada Pension Plan Borrowing	(0.8)	(0.8)	–
Decrease/(Increase) in Short-Term Borrowing	(3.0)	(3.0)	–
Increase/(Decrease) in Cash, Cash Equivalents and Temporary Investments	(0.3)	3.8	4.1
Maturity of 2011–12 Debt Buyback	(1.2)	(1.2)	–
2012–13 Debt Buyback	–	1.7	1.7
Total Long-Term Public Borrowing	34.9	36.6	1.6
1 Reflects the 2012 Budget Plan as outlined in the April 25, 2012 fiscal update.
Note: Numbers may not add due to rounding.

The Province's deficit for 2012–13 is now projected to be $9.8 billion — a $5.0 billion improvement compared with the 2012 Budget forecast.

Interest on debt (IOD) expense is projected to be $10,372 million for 2012–13, and $10,605 million for 2013–14, which is lower than forecast in the 2012 Budget by $247 million and $610 million respectively. These reductions primarily reflect the impact of lower-than-forecast interest rates together with lower deficits.

TABLE 5.2 Medium-Term Borrowing Outlook: Province and Ontario Electricity Financial Corporation
($ Billions)

	2013–14	2014–15	2015–16
Deficit	11.7	10.1	7.2
Investment in Capital Assets	11.1	10.4	10.4
Non-Cash Adjustments	(3.9)	(3.1)	(3.0)
Net Loans/Investments	1.6	0.4	1.8
Debt Maturities	23.7	21.7	20.3
Debt Redemptions	0.3	0.3	0.3
Total Funding Requirement	44.5	39.8	37.1
Decrease/(Increase) in Short-Term Borrowing	(1.5)	(1.5)	–
Increase/(Decrease) in Cash, Cash Equivalents and Temporary Investments	(5.8)	(0.7)	–
Maturity of Debt Buybacks	(3.7)	–	–
Total Long-Term Public Borrowing	33.4	37.6	37.1
Note: Numbers may not add due to rounding.

The Province's total long-term public borrowing in 2013–14 is forecast to be $33.4 billion, $3.2 billion lower than the amount borrowed in 2012–13.

The Province has completed $1.6 billion of its 2013–14 long-term public borrowing requirement, by issuing two 30-year syndicated bonds in the domestic market in early April.

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 foreign exchange and interest costs when borrowing in international markets. This hedging process will become more complex due to the Dodd-Frank Act and Basel III regulations. Hedging may also become more expensive if proposals such as financial transaction taxes or mark-to-market derivatives taxes are legislated and implemented in Europe or the United States.

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 transaction costs and capital charges on the Province's counterparties. Derivatives trading liquidity would likely decline as well, making it more challenging to hedge the Province's large global bond issues.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $281.1 billion as at March 31, 2013, compared to $257.3 billion as at March 31, 2012, and a forecast of $278.5 billion in the 2012 Budget. The increase from the 2012 Budget forecast is mainly due to additional borrowing to pre-fund a portion of the 2013–14 borrowing requirement. When calculating total debt, the liability of this pre-funding is included, but, unlike in the calculation of net debt, the offsetting financial asset is not included.

Ontario's net debt is the difference between total liabilities and total financial assets. Ontario's net debt is projected to be $252.8 billion as at March 31, 2013 (March 31, 2012, $235.6 billion). This projection for March 31, 2013 is $7.0 billion below the forecast of $259.8 billion in the 2012 Budget, and includes the broader public sector's net debt of $13.0 billion (March 31, 2012, $14.3 billion).

After eliminating the deficit by 2017–18, overall spending increases will be restricted to one per cent below GDP growth until the Province's net debt-to-GDP ratio returns to the pre-recession level of 27 per cent.

Residual Stranded Debt Update

Interim 2012–13 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of about $1.0 billion, reducing the Corporation's unfunded liability from $12.3 billion as at March 31, 2012 to $11.3 billion as at March 31, 2013. Projected 2013–14 OEFC results are an excess of revenue over expense of about $0.9 billion, which would reduce the unfunded liability to $10.4 billion as at March 31, 2014.

As published in the 2012 Ontario Economic Outlook and Fiscal Review, the Minister of Finance determined the residual stranded debt to be $4.5 billion as at March 31, 2012, consistent with the estimate provided in the 2012 Budget. Under Ontario Regulation 89/12, the determination of residual stranded debt as at March 31, 2013, will be made by the Minister of Finance after the OEFC submits to the Minister its annual report, including the audited financial statements, and by no later than March 31, 2014. Residual stranded debt estimates are subject to uncertainty in forecasting future dedicated revenues to OEFC, which depend on the financial performance of Ontario Power Generation Inc., Hydro One Inc. and municipal electrical utilities, as well as other factors such as electricity consumption and interest rates.

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, as at March 31, 2013, totals $267.5 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $13.6 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 projected to be 37.5 per cent at the end of fiscal 2012–13, compared to the 39.4 per cent forecast in the 2012 Budget. This ratio is expected to peak at 40.4 per cent in 2015–16, lower than the 41.3 per cent forecast in the 2012 Budget.

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.1 per cent as at March 31, 2013 (March 31, 2012, 4.4 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.9 per cent.

For 2013–14, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $408 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 March 31, 2013, the interim values for net interest rate resetting exposure and foreign exchange exposure were 8.9 per cent and 0.8 per cent respectively. All exposures remained well below policy limits in 2012–13.

Consolidated Financial Tables

TABLE 5.3 Net Debt and Accumulated Deficit
($ Millions)

	2008–09	2009–10	2010–11	2011–12	Interim 2012–13	Plan 2013–14
Debt1
Publicly Held Debt
Bonds2	145,488	175,899	200,074	223,467	245,544	254,949
Treasury Bills	9,044	13,914	14,925	11,925	13,024	14,564
U.S. Commercial Paper2	2,006	3,087	3,242	4,701	6,611	6,611
Infrastructure Ontario (IO)3	1,695	1,920	1,989	1,854	1,909	1,609
Other	68	296	353	347	360	332
	158,301	195,116	220,583	242,294	267,448	278,065
Non-Public Debt
Canada Pension Plan Investment Fund	10,233	10,233	10,233	10,233	10,233	10,233
Ontario Teachers' Pension Fund	3,001	1,765	1,205	625	–	–
Public Service Pension Fund	1,991	1,713	1,403	1,048	656	226
Ontario Public Service Employees' Union Pension Fund (OPSEU)	946	814	667	498	312	108
Canada Mortgage and Housing Corporation	811	755	696	635	570	502
Other4	1,632	1,726	1,842	1,945	1,857	1,719
	18,614	17,006	16,046	14,984	13,628	12,788
Total Debt	176,915	212,122	236,629	257,278	281,076	290,853
Cash and Temporary Investments	(11,878)	(17,102)	(22,416)	(21,180)	(25,166)	(19,284)
Total Debt Net of Cash and Temporary Investments	165,037	195,020	214,213	236,098	255,910	271,569
Other Net (Assets)/Liabilities5	(8,948)	(15,598)	(13,261)	(14,862)	(16,143)	(11,584)
Broader Public Sector (BPS) Net Debt	13,496	14,167	13,559	14,346	13,023	12,825
Net Debt	169,585	193,589	214,511	235,582	252,790	272,810
Non-Financial Assets6	(56,347)	(62,632)	(69,938)	(77,172)	(84,598)	(92,875)
Accumulated Deficit	113,238	130,957	144,573	158,410	168,192	179,935
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 2012–13 debt is composed of Infrastructure Renewal Bonds of $1,250million (2011–12, $1,250 million)and short-term commercial paper of $659million (2011–12, $604 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 businessenterprises, 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)

	2014–15	2015–16
Total Debt	308.1	323.8
Cash and Temporary Investments	(18.6)	(18.6)
Total Debt Net of Cash and Temporary Investments	289.5	305.2
Other Net (Assets)/Liabilities	(11.9)	(13.1)
Broader Public Sector (BPS) Net Debt	12.5	11.7
Net Debt	290.1	303.9
Non-Financial Assets	(100.0)	(106.6)
Accumulated Deficit	190.1	197.3
Note: Numbers may not add due to rounding.

TABLE 5.5 Debt Maturity Schedule
($ Millions)

Currency
	Canadian Dollar	U.S. Dollar	Japanese Yen	Euro	Other Currencies1	Interim 2012–13 Total	2011–12 Total
Fiscal Year Payable
Year 1	28,666	12,593	163	2,345	1,621	45,388	33,705
Year 2	11,797	9,022	54	–	752	21,625	24,993
Year 3	8,446	9,811	1,033	–	1,798	21,088	21,671
Year 4	11,213	7,107	–	–	496	18,816	16,723
Year 5	11,096	4,729	–	385	–	16,210	18,857
1–5 years	71,218	43,262	1,250	2,730	4,667	123,127	115,949
6–10 years	47,478	7,527	474	6,278	2,048	63,805	52,904
11–15 years	18,794	–	–	–	–	18,794	16,963
16–20 years	14,229	–	–	–	–	14,229	14,200
21–25 years	21,920	–	–	–	–	21,920	17,091
26–50 years2	39,201	–	–	–	–	39,201	40,171
Total3	212,840	50,789	1,724	9,008	6,715	281,076	257,278
Debt Issued for Provincial Purposes	188,731	48,835	1,724	8,829	5,621	253,740	230,314
OEFC Debt	24,109	1,954	–	179	1,094	27,336	26,964
Total	212,840	50,789	1,724	9,008	6,715	281,076	257,278
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, 2062.
3 Total foreign currency denominated debt for interim 2012–13 is $68.2 billion (2011–12, $65.3 billion). Of that, $66.3 billion or 97.1 per cent (2011–12, $63.0 billion or 96.4 per cent) was fully hedged to Canadian dollars.

TABLE 5.6 Derivative Portfolio Notional Value
($ Millions)

Maturity in Fiscal Year	2013–14	2014–15	2015–16	2016–17	2017–18	6–10 Years	Over 10 Years	Interim 2012–13 Total	2011–12 Total
Swaps:
Interest rate1	15,398	23,687	19,272	17,812	10,730	22,752	7,385	117,036	112,799
Cross currency	11,702	9,650	8,649	8,349	3,676	19,848	–	61,874	65,780
Forward foreign exchange contracts	19,303	–	–	–	–	–	–	19,303	11,877
Swaptions2	100	150	–	500	–	–	–	750	750
Total	46,503	33,487	27,921	26,661	14,406	42,600	7,385	198,963	191,206
1 Includes $3.7 billion (2012, $3.2 billion) of interest rate swaps related to loans receivable held by consolidated entity.
2 An interest rate swap option contract.
Source: Ontario Financing Authority.

The table above presents the maturity schedule of the Province's derivatives by type, interim as at March 31, 2013, 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.