DBRS Confirms OMERS Administration Corporation at AAA and OFT at R-1 (high)

DBRS Limited (DBRS) confirmed the Issuer Rating of OMERS Administration Corporation (OMERS or the Fund) at AAA and the Canadian Commercial Paper (Canadian CP) and U.S. Commercial Paper (U.S. CP; collectively, with the Canadian CP, the CP) ratings of OMERS Finance Trust (OFT) at R-1 (high). The trends on all ratings remain Stable. DBRS notes that the ratings on 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.

OMERS delivered a 11.5% net fund return (12.1% gross return) in 2017, outperforming its benchmark by 420 basis points (bps) as all major asset classes performed well over the year, with particularly strong results in public equities. Public equities generated a 14.7% net return, contributing most to the public market portfolio’s 11.4% net return. Private market assets collectively returned 11.6% in 2017, from strong performance across all private market asset classes. Net investment income of $9.7 billion and net contribution inflows drove net assets to $94.2 billion as at December 31, 2017 (excluding the Retirement Compensation Arrangement (RCA), and the Additional Voluntary Contributions (AVC) component). This increase helped to reduce the Plan’s funding deficit to $5.4 billion as at YE2017 on a going-concern basis; the Plan remains on track to be fully funded by 2025.

Lower outstanding Canadian CP decreased debt with recourse to the Fund to $2.3 billion from $2.7 billion, or 2.4% of adjusted net assets by YE2017, comfortably below the internal 10.0% limit set by management and providing considerable room for cyclical fluctuations in asset values. Subsequent to fiscal year-end, OFT established a U.S. commercial paper program and the OMERS-guaranteed Series D Debentures of OMERS Realty Corporation (ORC) were repaid. OMERS maintains a credit facility as backup liquidity support for the CP program, which meets the DBRS criteria outlined in “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers.” DBRS notes that the maximum authorized CP limit (Canadian and U.S. combined) was increased to $5.0 billion from $3.1 billion in January 2018, when the U.S. CP program was established. Correspondingly, the credit facility used as backup liquidity support for the CP program was increased from $2.325 billion to $3.75 billion (75% of the authorized CP limit). 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.

In 2015, OMERS and OMERS Sponsors Corporation (the SC) developed a joint strategy covering the 2016–2020 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. OMERS conducted an Asset Mix Study in 2016, resulting in 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 assets (private equity and real assets) increased to 55% from 47%. In 2017, with no changes made to the target asset mix, OMERS continued to make progress in executing its 2020 Strategy, OMERS and the SC began development of the 2030 Strategy and the SC began a Comprehensive Plan Review of the design of the Plan.

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.