DBRS Confirms Ratings on OPB Finance Trust’s Debentures at AA (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings on the outstanding debentures of the OPB Finance Trust (the Trust or the Issuer) at AA (high) with Stable trends. The ratings are supported by the unconditional and irrevocable guarantees provided on the Debentures by Ontario Pension Board (OPB), which has the exclusive mandate to manage the assets of the Ontario Public Service Pension Plan (PSPP or the Plan). The Trust also benefits from the significant Plan assets available to meet potential guaranteed obligations. DBRS notes, however, that the Plan’s demographics are weaker than those of other DBRS-rated plans and there is the potential for a further loss of active membership from the modernization of operations at a number of Ontario Lottery and Gaming Corporation (OLG) facilities.

In 2014, OPB generated a return of 8.4%, underperforming its benchmark by 100 basis points. Performance was mixed across asset classes. The Fund benefited from an overweight position in public equities and strong returns to its infrastructure and private equity portfolios, while the underperformance relative to the benchmark was due in part to the decline in interest rates that took place in mid-2014. Nevertheless, the result surpassed the Plan’s expected average rate of return of 5.95% and drove net assets higher to $22.2 billion, an increase of 6.3%. This helped to further improve the funding status of the Plan, reaching 98% funded at year-end on a going concern basis.

The most recent actuarial study indicates a going concern deficit of $430 million as of December 31, 2014. This was well below the $804 million going concern deficit reported a year earlier and largely reflects the strong investment returns and revised salary restraint assumptions. The Plan continues to face a weaker demographic profile than other rated plans and may face further challenges in the short term from the transition to cost sharing of post-retirement benefits and modernization of a number of OLG facilities.

In February 2015, the Plan issued $250 million in Series D Debentures, which increased total debt with recourse to the Plan to $1.03 billion, or about 4.4% of adjusted net assets. The significant level of assets under management and ample liquidity provide OPB with sufficient flexibility to meets its obligations.

OPB continues to transition to a portfolio mix with a large allocation to private markets to enhance risk-adjusted returns, reduce portfolio volatility and improve asset-liability matching. As the Fund continues to increase its allocations to real estate and infrastructure, DBRS expects the OPB’s debt burden to rise further. OPB continues to have ample room within the rating to support further borrowing.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Public Pension funds & Related Exclusive Asset Managers and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.