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

DBRS has today confirmed the Senior Unsecured Debt and Commercial Paper ratings of the Ontario Infrastructure and Lands Corporation (Infrastructure Ontario or IO) at AA and R-1 (high), respectively. IO’s credit profile remains strong, supported by its considerable reserve fund, and the credit quality of its $3.5 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 rating, as IO operates at arm’s length and maintains a substantial liquidity reserve to buttress its lending activities.

After recording its first profitable year in 2009-10, IO’s net income rose further to $28.8 million in 2010-11. The bulk of the earnings represent project delivery revenue received from the Province on account of Alternative Finance and Procurement (AFP) expenditure expensed by IO in previous years. A more accurate picture of IO’s profitability is painted by the $4.1 million in income from its loan program activities, a significant increase from just $376,000 the previous year. The positive loan results are indicative of the portfolio having exceeded its break-even threshold of $3.0 billion, and profitability is expected to continue as the size of the portfolio continues to grow.

Market debt increased only $69 million over the year, rising to $2.0 billion as of March 31, 2011. The increase is largely attributable to an increase in commercial paper (CP) outstanding to $739 million, a level that bumped up against IO’s CP limit, and pushed the reserve-to-CP ratio down temporarily to 1.35 times, which is below the requirement for an R-1 (high) rating. However, a recent financial update revealed that the ratio improved to 1.6 times, an adequate level within the current rating, as the CP level was brought down to $660 million by September 30, 2011, and loan repayments added greater liquidity to the reserve base.

Management has indicated an intention to maintain an adequate buffer in its CP program to address any unexpected short-term financing needs, given the growing number of approved and undrawn loans.

Growth in the loan portfolio continued at a robust pace, rising 32% year-over-year to $3.1 billion by fiscal year-end, and increased further to $3.5 billion by December 31, 2011. The increase reflects the substantial number of loan approvals granted in 2009 and 2010, as there is a one- to two-year time lag between approvals of a project and advancing funds. New sectors have been added to the loan program in recent years, leading to greater diversification of the loan portfolio, though municipalities still dominate, and as a group represent the lowest risk sector. Tightened lending standards and a new credit monitoring process have been introduced to better manage the growth of the non-municipal sectors within the portfolio.

Loan demand remains robust, and will continue the upward pressure on debt over the medium term, as undrawn commitments totalled $1.2 billion by December 31, 2011. IO’s ability to issue debt to the Province or Crown agencies on a subordinated basis to fund future loan advances mitigates this pressure to some degree. DBRS notes that the considerable credit enhancement provided by IO’s reserve fund and the generally sound credit quality of the loan portfolio provide support for IO’s continued growth within the current rating.

On June 6, 2011, the former Ontario Infrastructure and Projects Corporation was merged with the Ontario Realty Corporation (ORC) and Stadium Corporation of Ontario Limited (STADCO) to create the Ontario Infrastructure and Lands Corporation. The mandate of the new entity mirrors that of its predecessor agencies; assisting public-sector entities in the financing of capital expenditures and the property management of the Government of Ontario’s real estate assets. IO remains an agent of the Crown, 100% owned by the Province (IO does not act in its capacity as a Crown agent when borrowing). The merger had no material impact on the credit quality of outstanding DBRS-rated securities.

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

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