DBRS Confirms Infrastructure Ontario’s Ratings at AA, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of the Ontario Infrastructure and Lands Corporation (IO) at AA. The trends remain Stable, supported by IO’s considerable reserve fund, the sound credit quality of its loan portfolio, its prudent credit risk management practices and a gradual elimination of asset-liability mismatches, along with a declining proportion of senior debt. However, the rating is constrained by the strong linkage between IO and the Province of Ontario (the Province; rated AA (low) and R-1 (middle)).

IO recorded a consolidated operating surplus of $3.3 million in F2015. Total revenues declined by 1.7% on account of lower project delivery fees and recoverable advisory costs. Meanwhile, total expenditures rose by 5.6% with increases primarily driven by higher interest expense and wage and benefits costs. DBRS expects IO to report a modest surplus again in F2016 and similar results over the medium term, as the loan program has now garnered critical mass and is fully self-sustaining. Any in-year variability in performance is likely to come from changes in the volume or timing of income realized in other divisions, namely major projects, real estate or commercial projects. Furthermore, DBRS believes that loan losses should remain low, in light of IO’s tightened underwriting standards, and should help to minimize any potential negative impact on operations.

Total market debt amounted to $950 million as of March 31, 2015, down from $1.6 billion the prior year. The commercial paper program was discontinued and refinanced through a subordinated short-term credit facility from the Province, which accounted for the reduction in market debt. Subsequent to year-end, the $650 million 2005-A1 infrastructure renewal bond (IRB) matured and was refinanced through a long-term subordinated loan from the Province. There is now only one series of IRBs outstanding – 2007-A1 IRB – which is the only senior debt remaining and matures in 2037. Going forward, IO has no plans to access the capital markets on its own. As such, any new funding required is expected to be obtained on a subordinated basis through the Province or its agencies for both short- and long-term needs. Furthermore, a new service level agreement with the Ontario Financing Authority (OFA) now allows IO to fund all new loans through on-demand, back-to-back loans, thereby eliminating interest rate risk and the need for asset-liability matching. Reserves are expected to remain more than sufficient to cover expected losses in the portfolio and allow for further loan growth, which supports the current ratings.

While not anticipated, a negative rating action could occur as a result of a deterioration in the Province’s credit rating or a notable deterioration in credit quality and performance within the loan portfolio. DBRS does not envision a scenario that could lead to upward rating pressure.

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 General Corporate Methodology: Appendix for Ontario Infrastructure and Lands Corporation, which can be found on our website under Methodologies.