Morningstar DBRS Upgrades the Province of Ontario to AA, Trends Stable

DBRS Limited (Morningstar DBRS) upgraded the Issuer Rating and the Long-Term Debt rating of the Province of Ontario (Ontario or the Province) to AA from AA (low), and the Short-Term Debt rating to R-1 (high) from R-1 (middle). Morningstar DBRS also upgraded the Ontario Electricity Financial Corporation's (OEFC) Long-Term Obligations rating to AA from AA (low) (based on the Province's rating). The trend on all ratings has been changed to Stable from Positive.

KEY CREDIT RATING CONSIDERATIONS
In December 2023, Morningstar DBRS indicated that the ratings could be upgraded by one notch provided the Province continued to demonstrate prudent fiscal discipline and the outlook for key financial risk metrics did not materially deteriorate. Based on the 2024 budget, Ontario's near-term fiscal outlook is modestly weaker; however, key financial risk metrics remain roughly in line with Morningstar DBRS' previous expectations and support the ratings upgrade.

For 2024-25, the budget projects a deficit of $9.8 billion, after incorporating a $1.0 billion reserve. On a Morningstar DBRS-adjusted basis, after including capital expenditure (capex) as incurred rather than as amortized and assuming some modest capex underspending, this equates to a deficit of $21.7 billion, or 1.9% of GDP. Based on the Province's medium-term plan, Morningstar DBRS-adjusted deficits of 1.6% of GDP and 1.0% of GDP are expected in the following two years. The Province has used relatively conservative economic planning assumptions, which present some potential flexibility to manage unforeseen revenue or expense pressures or support bottom-line improvement.

For 2024, the Province has assumed real GDP growth of just 0.3%, followed by a rebound in real GDP growth to 1.9% in 2025. Although inflation appears to be easing, a slower than anticipated return to 2% target inflation and the resulting persistence of higher interest rates could present downside risks to the outlook. Additionally, weaker than expected economic growth in the United States, and other key trading partners, or geopolitical developments leading to trade tensions and supply chain disruptions may also present downside risks.

Despite a softer fiscal outlook and higher borrowing needs, the Province remains committed to its debt reduction strategy with key thresholds unchanged. On a Morningstar DBRS-adjusted basis, the debt-to-GDP ratio is estimated to be 41.2% in 2024-25, before falling to roughly 39.0% by 2026-27.

CREDIT RATING DRIVERS
A negative rating action could result from a deterioration in one or more critical rating factors or a material deterioration in financial risk metrics. A further positive rating action is considered unlikely and would be dependent on further material improvement in critical rating factors and key financial risk metrics.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), ttps://dbrs.morningstar.com/research/427030.

CRITICAL RATING FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRFs
In the analysis of the Province of Ontario, the CRFs are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Province of Ontario, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRF and the FRA
In the analysis of the Province of Ontario, the CRF carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:

-- Rating Canadian Provincial and Territorial Governments (April 15, 2024),
https://dbrs.morningstar.com/research/431208
-- Global Methodology for Rating Government Related Entities (April 15, 2024),
https://dbrs.morningstar.com/research/431178

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Travis Shaw, Senior Vice President, Sector Lead
Rating Committee Chair: Thomas R. Torgerson, Managing Director
Initial Rating Date: May 15, 1987

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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