DBRS Confirms Ontario School Boards Financing Corporation at AA (low) with Stable Trends

DBRS Limited (DBRS) confirmed the ratings on the Series 2007-A1, 2006-A1, 2005-A1, 2004-A1, 2003-A2, 2002-A2, 2001-A3 and 2000-A1 Pooled Debentures Ownership Interests issued by Ontario School Boards Financing Corporation (OSBFC) at AA (low) with Stable trends. DBRS also discontinued the rating on the Series 2002-A1 Pooled Debentures Ownership Interests following its maturity on October 11, 2017. While not guaranteed by the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS), the ratings reflect (1) the strong linkage to the Province as the primary source of school board revenues used to service OSBFC debt, (2) the importance of education as a public-policy priority and (3) the strong Provincial oversight and monitoring of school boards.

While the school board funding formula in Ontario is largely enrolment based, it has been adjusted over time to account for key structural changes, the most pressing of which has been the persistent decline in the school-age population over the last decade. The Province effectively eliminated enrolment sensitivity from capital-related components of the funding formula in 2009–10. Capital grants are now tied directly to actual capital expenditures while the majority of debt is supported with dedicated grants to maturity. Notwithstanding these changes, some boards still use the enrolment-sensitive annual School Renewal Allocation grant to service a small portion of debt.

As such, DBRS continues to monitor the few school boards that still rely on this enrolment-sensitive funding and other revenues for the servicing of debt not supported by prior capital grants (unsupported debt). Particular attention is paid to school boards that exhibit a debt service coverage ratio below 1.0 times. DBRS reviews financial circumstances at these boards and has obtained assurances from the Province that there are credible plans in place to cover unsupported debt charges. In most cases, boards have accumulated surpluses or other grants sufficient to cover unsupported debt charges. New capital projects that rely on uncertain future revenue streams or variable grants are not being approved by the Ontario Ministry of Education, which is expected to reduce unsupported debt balances over time.

RATING DRIVERS
There has been little change in the OSBFC credit profile in recent years, with no OSBFC debt issued since 2007 and new financing for board capital projects undertaken through the Ontario Financing Authority. Provincial oversight and the mechanisms in place to ensure the financial integrity of board finances remain robust, with requirements in place for pre-approval of capital spending plans and the maintenance of balanced operating budgets. Given the close link with the Provincial funder, a change to the Province’s credit outlook would have rating implications for all OSBFC obligations.

Notes:
The principal methodology is General Corporate Methodology: Appendix 3 — Ontario School Boards Financing Corporation, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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