DBRS Confirms OMERS Administration Corporation and Related Ratings at AAA and R-1 (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of OMERS Administration Corporation (OMERS or the Fund) at AAA, the Series D Debentures (guaranteed) rating of OMERS Realty Corporation (ORC) at AAA and the Commercial Paper (CP) rating of OMERS Finance Trust at R-1 (high). The trends on all ratings remain Stable. DBRS notes that the ratings on the Series D Debentures (guaranteed) and the CP are predicated on the unconditional and irrevocable guarantees provided by OMERS on issuances. Despite the funding deficit in the OMERS Primary Pension Plan (the Plan), the ratings continue to be supported by the Fund’s high level of assets, low recourse debt burden, large base of financially sound employers and healthy demographic profile, which result in sustained net contribution inflows.

OMERS delivered a 10.3% net fund return (10.9% gross return) in 2016, outperforming its benchmark by 240 basis points, as both public and private markets had a strong year. The public market portfolio generated a 9.5% net return, which is much higher than the previous year’s 0.7% return, and the private market assets collectively returned 12.0% in 2016, which is slightly weaker than the prior year’s return. Net investment income of $7.9 billion and net contribution inflows drove net assets to $84.6 billion as at December 31, 2016 (excluding the Retirement Compensation Arrangement and the Additional Voluntary Contributions component). This increase helped to reduce the Plan’s funding deficit to $5.7 billion as at YE2016 on a going-concern basis; the Plan remains on track to be fully funded by 2025.

Lower outstanding CP decreased debt with recourse to the Fund to $2.7 billion from $4.2 billion, or 3.1% of adjusted net assets by YE2016 — comfortably below the internal 10.0% limit set by management. Current recourse debt levels remain commensurate with the assigned ratings and add financial flexibility. OMERS maintains a credit facility as backup liquidity support for the CP program, which meets the DBRS criteria outlined in the methodology “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” (March 2017). While overall leverage is expected to increase as the Fund broadens its global reach in private market assets and seeks to capitalize on the low-interest-rate environment, DBRS expects recourse debt to grow in a measured fashion.

OMERS has experienced considerable transition over the past few years. There have been several notable changes at the senior management level as well as portfolio restructurings and investment team consolidation. In 2015, OMERS and OMERS Sponsors Corporation developed a new joint strategy covering the 2016 to 2020 period, which addresses aging plan members and an uncertain investment climate. The strategy focuses on becoming fully funded by 2025; improving member, employer and stakeholder satisfaction; and managing expenses and costs per member. In 2016, OMERS continued to make progress in executing its strategy, including conducting a new Asset Mix Study. As a result of the study, in December 2016, OMERS’s Board approved an increase to its long-term target allocations to infrastructure, private equity and real estate and an addition of an explicit allocation to credit. Overall, the long-term target allocation to public market assets (including private credit) decreased to 45% from 53%, while the long-term target allocation to private market equity assets (private equity and real assets) increased to 55% from 47%.

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 principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers, Structured Finance Flow-Through Ratings and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.