Morningstar DBRS Confirms Ontario School Boards Financing Corporation's Ratings at AA, Stable

DBRS Limited (Morningstar DBRS) confirmed its credit 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 with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
While OSBFC is not guaranteed by the Province of Ontario (Ontario or the Province; rated AA with a Stable trend), Morningstar DBRS considers it a government-related entity and assesses the relationship between OSBFC and Ontario based on an implicit, but very high, support. This assessment reflects the critical and unique public-sector role of OSBFC in servicing legacy debentures, strong government funding and control of school board finances, and the close involvement of the Ontario Ministry of Education (the Ministry) in OSBFC debt-servicing needs. OSBFC exhibits a strong linkage to the Province as it is the primary source of school board revenue used to service OSBFC debt, education remains an important public policy priority, and the Ministry demonstrates strong oversight and monitoring of school boards.

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. Although predominantly enrolment-based, the school board funding formula in Ontario 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 (capex), while most legacy debt is supported by dedicated debt-service grants to maturity.

However, some boards continue to use the older enrolment-sensitive School Renewal Allocation (SRA) grant to service a small portion of their debt, making funding levels somewhat vulnerable to enrolment risk. Morningstar DBRS 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. Morningstar DBRS has reviewed these boards' financial circumstances and believes there are credible plans in place to cover unsupported debt charges (including OSBFC obligations) through accumulated surpluses and/or debt-servicing grants.

The financial health of OSBFC borrower school boards remains manageable, and Morningstar DBRS anticipates timely government intervention if the need arises. Aside from expense pressures, some deterioration arising from enrolment uncertainty will affect school boards' finances differently depending on their local demographic outlook. Morningstar DBRS understands that the Ministry remains apprised and there is a funding stabilization mechanism within the Core Education Funding to bolster financial sustainability at affected school boards.

Because of the importance of the Province and its funding to the system, the credit rating on an individual OSBFC debt series cannot exceed that of the Province; however, the credit 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 Morningstar DBRS to question the Province's commitment to supporting individual school boards or the effectiveness of the provincial monitoring framework.

CREDIT 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. 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

Morningstar DBRS applied the following principal methodology:
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 methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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-DBRS@morningstar.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.

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.

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

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