DBRS Confirms Ontario Infrastructure Projects Corporation at AA and R-1 (high)

DBRS has today confirmed the Senior Unsecured Debt and Commercial Paper ratings of Ontario Infrastructure Projects Corporation (Infrastructure Ontario or IO) at AA and R-1 (high), respectively. The trend on each rating remains Stable.

IO’s credit profile remains strong, supported by its considerable reserve fund, $954 million as of March 31, 2010, and the credit quality of its $3 billion loan portfolio. DBRS notes that while IO’s credit strength is affected by the Province of Ontario (the Province, rated AA (low)), it is not capped at the Province’s ratings as IO operates at arm’s length and maintains a substantial liquidity reserve to buttress its lending activities.

IO posted net income of $2.9 million for the year ending March 31, 2010. This was the first year since its creation that IO posted positive income and the change stems primarily from two factors: the expiry of outstanding legacy loan agreements whereby IO was obligated to provide subsidized financing; and income from its Alternate Financing and Procurement (AFP) activities. However, it must be recognized that AFP income reflects a timing lag between when services are provided and expensed and when the offsetting revenue is received.

Total market debt increased to $1.9 billion from $1.7 billion at fiscal year end March 31, 2010, all due to growth in outstanding commercial paper of 62.8% from the previous year. The loan portfolio increased substantially in 2010 largely as a result of previously approved projects, dominated by the electrical, housing and long-term care sectors. Year-over-fiscal-year, the loan program grew by $587 million to $2.3 billion, although loans outstanding had grown further to $3 billion by December 31, 2010.

Despite an anticipated decline in applications the loan portfolio is expected to continue to grow in 2011 due to the substantial number of loan approvals granted in 2009 and 2010. Loan demand will continue the upward pressure on debt over the medium term. IO’s ability to issue debt to the Province on a subordinated basis to fund future loan advances mitigates this pressure to some degree. DBRS notes that IO maintains ample room for growth of its portfolio within the current rating given the considerable credit enhancement provided by its reserve fund and the generally sound credit quality of the municipal borrowers that dominate the loan portfolio.

On January 25, 2011, the Province announced that it intends to introduce legislation to merge IO with the Ontario Realty Corporation (ORC). DBRS expects that the newly-formed entity would assume IO’s debt obligations and that there would be no changes to IO’s reserve holdings, capitalization or debt issuance programs. As a result, DBRS does not expect the merger to have any adverse effect on Infrastructure Ontario’s rating and intends to comment as appropriate when more information becomes available.

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

DBRS ratings on Infrastructure Ontario are primarily based on the provincial framework governing operations, the credit quality of the loan portfolio, the size of the reserve fund relative to outstanding debt, the sustainability of the loan operations and IO’s track record of prudent management.