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

DBRS Limited (DBRS) confirmed the AAA Issuer Rating of OMERS Administration Corporation (OMERS or the Fund). DBRS also confirmed the R-1 (high) ratings on the Canadian Commercial Paper (Canadian CP) and U.S. Commercial Paper (U.S. CP; collectively, with the Canadian CP, the CP) of OMERS Finance Trust (OFT), as well as the AAA rating on OFT’s Medium-Term Notes (MTNs). The trend on all ratings is Stable. DBRS notes that the ratings on the CP and MTNs 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 2.3% net fund return (3.0% gross return) in 2018, underperforming its benchmark return of 7.3% as volatility and much uncertainty in the capital markets, particularly closer to the end of 2018, put downward pressure on prices of major capital market assets. Public equities delivered a negative 8.3% net return, hindering the overall return on the portfolio. The losses within public equities were offset by a strong return of 10.7% generated by private market assets. Net investment income of $2.2 billion drove net assets to $96.3 billion as at December 31, 2018 (excluding the Retirement Compensation Arrangement and the Additional Voluntary Contributions component). The Plan’s funding deficit decreased to $4.2 billion as at YE2018 on a going-concern basis; the Plan remains on track to be fully funded by 2025.

Higher outstanding CP increased debt with recourse to the Fund to $5.3 billion from $2.3 billion, or 5.3% of adjusted net assets by YE2018, comfortably below the internal 10.0% limit set by management and providing considerable room for cyclical fluctuations in asset values. Subsequent to the fiscal year end, OFT established an MTN program and issued two series of notes: USD 1.25 billion MTNs and CAD 1.0 billion MTNs. OMERS maintains a credit facility as backup liquidity support for the CP programs, 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. CP programs 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 to $3.75 billion from $2.325 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 to 2020 period, which addresses plan maturity and longer life expectancy, changing demographics and workplace trends, an uncertain investment climate and certain technological and legislative developments. In 2018, the SC continued the Comprehensive Plan Review to evaluate and explore opportunities to enhance plan sustainability and address funding risks. There were no changes to the target asset mix in 2018, and the next Asset Liability Study is expected to be conducted in 2019.

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

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 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.

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