DBRS Confirms OMERS at AAA and R-1 (high); Borealis Finance Trust at R-1 (high)

DBRS has today confirmed the Counterparty Rating of OMERS Administration Corporation (OMERS) at AAA. OMERS Realty Corporation’s short- and long-term ratings of R-1 (high) and AAA, respectively, and the R-1 (high) rating of Borealis Finance Trust have also been confirmed, based on the unconditional guarantee provided by OMERS to the debt programs. The trends on the ratings remain Stable, although OMERS’ financial position changed notably in 2008 because of the substantial investment losses recorded during the year, which drove down net assets and pushed OMERS Primary Pension Plan into a small deficit. However, the credit profile remains solid, supported by a high ratio of active-to-retired plan members, financially sound employer sponsors and the sizable portfolio of assets that greatly outweighs the value of OMERS’ debt obligations.

OMERS’ portfolio recorded a loss of 15.3% in 2008 and underperformed its benchmark by 210 basis points. However, OMERS continues to exceed its ten-year average benchmark by 90 basis points. The poor results stemmed predominantly from the global deterioration in investment conditions, which caused severe losses in Canadian public, non-Canadian public and private equities. Infrastructure, real estate and fixed income portfolios recorded sound gains, partially offsetting the poor equity returns.

The considerable investment loss only pushed the funding status into a modest deficit of $279 million on a going concern basis, as the actuarial smoothing mechanism continued to recognize prior years’ gains while amortizing the difference between the actuarial assumed return and the current year’s loss over a five-year period. As a result, the actuarial smoothing reserve now contains roughly $6.4 billion in net losses yet to be amortized, which will put considerable pressure on the funding deficit going forward. OMERS is confident that it can achieve investment returns in excess of the actuarial assumption of 6.5% in the following years to help offset some of the accumulated losses. Nevertheless, DBRS expects investment conditions to remain challenging throughout the current recession, which will likely require OMERS Sponsor Corporation to increase contribution rates and/or reduce benefits to deal with the funding deficiency when the next actuarial valuation is filed, which is required for December 31, 2010, at the latest.

OMERS-guaranteed debt increased by $1.3 billion in 2008, due mainly to initial financing for the Teranet Inc. acquisition. This pushed recourse debt to a total of $3.7 billion, or a still-moderate 7.8% of adjusted net assets. Over 2009, recourse debt is forecast to post notable growth of $700 million to $800 million fuelled by financing needs related to various investments. Nonetheless, the total recourse debt burden is projected to remain below 10% of adjusted net assets, which is well manageable within the current rating and leaves flexibility within the credit profile.

Note:
All figures are in Canadian dollars unless otherwise noted.

DBRS ratings on public pension funds and pension fund asset managers are primarily based on the funding status, membership fundamentals and cash flow outlook of the public pension plan or pension plan depositors, the net asset and liquidity position of the fund in relation to outstanding recourse debt, the fund’s investment track record and portfolio management strategy as well as the financial strength of plan contributors.

This is a Corporate (Public Finance) rating.