DBRS Morningstar Confirms Ontario School Boards Financing Corporation’s Ratings at AA (low), Stable

DBRS Limited (DBRS Morningstar) confirmed its 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.

While OSBFC is not guaranteed by the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar), DBRS Morningstar considers it a government related entity, reflecting (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 oversight and monitoring of school boards by the Ontario Ministry of Education (the Ministry).

For 2022–23, the Ministry has indicated that the financial situation at the majority of school boards started to stabilize as Coronavirus Disease (COVID-19) pandemic-driven pressures lessened to a degree. DBRS Morningstar understands that a less-challenging operating environment should help school boards preserve existing reserves and accumulate surpluses over time. Over the longer term, certain unfavourable trends, such as migration out of the province and shifting real estate dynamics, could adversely affect enrolment at some school boards in affected regions (particularly large urban areas).

The credit profile of OSBFC’s obligations is stable with no new OSBFC debt issued since 2007. Provincial oversight of school boards and mechanisms in place to ensure financial integrity are robust, with requirements for the maintenance of balanced budgets and the preapproval of capital spending. The school board funding formula in Ontario is largely enrolment based, although it has been adjusted over time to account for key structural changes, including demographic trends. The Province modified the funding formula in 2009–10 to offset the volatility associated with enrolment trends. As a result, capital grants are now tied directly to actual capital expenditures, while most legacy debt is supported by dedicated debt service grants to maturity.

In contrast, some boards continue to use the older enrolment-sensitive School Renewal Allocation grant to service a small portion of their debt, making funding levels vulnerable to enrolment risk. DBRS Morningstar continues to monitor these school boards for debt servicing that is not supported by prior capital grants (i.e., unsupported debt), with special emphasis on school boards that have a debt service coverage ratio below 1.0 times. DBRS Morningstar has reviewed these boards’ financial circumstances and currently believes there are credible plans in place to cover unsupported debt charges (including OSBFC obligations) through accumulated surpluses and/or debt servicing grants, if required.

Because of the importance of the Province and its funding to the system, the rating on an individual OSBFC debt series cannot exceed that of the Province; however, the rating on one or more specific OSBFC series could be lower than that of the Province if, for example, one of the participating school boards demonstrates excessive financial stress with no credible plan to overcome the problems or if an adverse unexpected development in the sector leads DBRS Morningstar to question the Province’s commitment to supporting individual school boards or the effectiveness of the provincial monitoring framework.

RATING DRIVERS
Given the close link with the government funder, any change to the Province’s credit rating would generally have an equal impact on all OSBFC obligations. Furthermore, the several-liability structure of the OSBFC borrowing pool implies that a material weakening in the credit profile of a single school board could trigger the downgrade of all related OSBFC debt tranches.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrsmorningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
The principal methodology applicable to the ratings is Global Methodology for Rating Government Related Entities (May 6, 2022; https://www.dbrsmorningstar.com/research/396497).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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