2007 Ontario Budget
CHAPTER IV
Borrowing and Debt Management
Long-Term Public Borrowing
As an agency of the Ministry of Finance, the primary responsibility of the Ontario Financing Authority (OFA) is
to manage the borrowing, debt, investment and cash management activities of the Province and the Ontario
Electricity Financial Corporation (OEFC) in a timely and cost-effective manner. The OEFC is the agency of the
Province responsible for managing the debt and certain other liabilities of the former Ontario Hydro Inc.
The interim long-term public borrowing requirement for 2006-07 is $18.7 billion, down $2.1 billion from the
$20.8 billion estimated in the 2006 Budget Plan. This decline is largely due to the elimination of the deficit.
Approximately $14.2 billion, or 76 per cent, of the borrowing program was completed in the domestic bond market
through a number of instruments, including:
• syndicated bonds
• medium-term notes
• Ontario Savings Bonds
• floating rate notes.
[Chart 1: Borrowing - Domestic Market. $14.2 billion issued]
The Province also issued bonds in other currencies, including:
• three $1 billion Global bonds in U.S. dollars
• Euro Medium-Term Notes (EMTNs) in U.S. dollars, South African rand and, for the first time, Turkish lira
• an inaugural Kangaroo (Australian dollar) bond.
[Chart 2: Borrowing - All Markets. $18.7 billion issued]
The OFA maintained a flexible approach to borrowing, monitoring both domestic and international capital markets
to minimize debt service costs and diversify the borrowing program. Approximately $4.5 billion, or 24 per cent,
of the borrowing program was raised from international markets.
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2006-07 Borrowing Program: Province and OEFC Table 1
($ Billions)
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Budget In-Year
Plan Interim Change
--------- ---------- ----------
Deficit/(Surplus) 2.4 (0.3) (2.7)
Non-Cash Adjustments (1.2) 0.2 1.4
Investment in Capital Assets 2.5 2.6 0.1
Net Loans/Investments 0.2 0.6 0.3
Debt Maturities:
Currently Outstanding 15.1 14.0 (1.2)
Incremental Impact of Future Financing - - -
Debt Redemptions 0.7 1.0 0.3
- ------------------------------------------------ --------- ---------- ----------
Total Funding Requirement 19.8 18.1 (1.7)
Canada Pension Plan Borrowing (0.4) (0.2) 0.2
Decrease/(Increase) in Short-Term Borrowing 1.4 1.3 (0.1)
Increase/(Decrease) in Cash and Cash - (0.5) (0.5)
Equivalents
- ------------------------------------------------ --------- ---------- ----------
Total Long-Term Public Borrowing Requirement 20.8 18.7 (2.1)
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Note: Numbers may not add due to rounding.
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The format of the borrowing table has changed from the 2006 Ontario Budget to more clearly communicate the
Province's borrowing program and its drivers. The top half of the table contains items that make up the Total
Funding Requirement. Total Long-Term Public Borrowing Requirement is reached by adjusting the Total Funding
Requirement by Canada Pension Plan Borrowing and net changes in Short-Term Borrowing and Cash. Non-Cash Items
Included in Deficit was renamed Non-Cash Adjustments, which now includes Amortization of Major Tangible Capital
Assets. Other Uses/(Sources) of Cash was renamed Net Loans/Investments.
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Medium-Term Borrowing Outlook: Province and OEFC Table 2
($ Billions)
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2007-08 2008-09 2009-10
------------- ------------- -----------
Deficit/(Surplus) 0.4 (0.3) (0.4)
Non-Cash Adjustments (0.5) (0.8) (0.7)
Investment in Capital Assets 3.3 3.5 4.0
Net Loans/Investments 1.2 0.9 0.2
Debt Maturities:
Currently Outstanding 14.4 20.1 14.4
Incremental Impact of Future Financing - - 0.6
Debt Redemptions 0.9 0.7 0.7
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Total Funding Requirement 19.7 24.1 18.8
Canada Pension Plan Borrowing (0.4) (0.6) (0.7)
Decrease/(Increase) in Short-Term Borrowing (0.5) (0.6) 0.9
Increase/(Decrease) in Cash and Cash Equivalents - - -
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Total Long-Term Public Borrowing Requirement 18.8 22.9 19.0
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Note: Numbers may not add due to rounding.
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Refinancing maturing debt remains the primary component of the medium-term borrowing outlook. Debt maturities for
the Province and the OEFC are projected at $14.4 billion in 2007-08, $20.1 billion in 2008-09 and $15.0 billion
in 2009-10.
As long as cost-effective opportunities continue to be available, at least 25 per cent of the long-term borrowing
program will be raised from international markets.
The government will seek approval by the legislature for additional borrowing authority to meet program
requirements. In addition, it will propose amendments to the Capital Investment Plan Act, 1993 to support the
execution of the borrowing program by the OFA.
Debt
[Chart 3: Debt ($Billions)]
The Province's total debt is projected to be $157.1 billion as at March 31, 2007, compared to $154.9 billion as at
March 31, 2006. Total debt represents all borrowing without offsetting financial assets.
Ontario's net debt, the difference between total liabilities and total financial assets, was $141.9 billion as at
March 31, 2006, and is projected to be $143.0 billion as at March 31, 2007.
While the Province is projecting a surplus for 2006-07, total debt is expected to increase due to the government's capital
investments in key priority areas and loans to school boards for capital projects. The increase in net debt is primarily a
result of the government's capital investments.
Investing in these projects is similar to a family investing in a house using a mortgage, which is paid off over time.
Like a mortgage, where the total amount is borrowed at the time a house is purchased, the government borrows the entire
amount required to invest in capital investments during construction. This increases total and net debt. On an annual basis,
the impact on the government's deficit or surplus is limited to the amortization costs of these capital investments.
Amortization spreads the cost of these investments over the useful life of the assets, instead of charging the total costs
upfront for an asset that will be used for many years.
Debt of the Ontario Infrastructure Projects Corporation ("OIPC" or "Infrastructure Ontario") is projected to be
$1.3 billion as at March 31, 2007. This debt is included in total debt; however, the impact on net debt is minimal, as its
debt is offset by projected net assets of $1.1 billion. Infrastructure Ontario's debt is not guaranteed by the Province.
Interim 2006-07 results for the OEFC show an excess of revenue over expense of $0.8 billion, reducing its unfunded
liability (or "stranded debt of the electricity sector") from $19.3 billion to $18.5 billion as at March 31, 2007. This is
the third consecutive year in which stranded debt has been paid down. Projected 2007-08 results for the OEFC are an excess
of revenue over expense of $1.1 billion, resulting in a further projected reduction in its unfunded liability to
$17.4 billion as at March 31, 2008.
Total Debt Composition
Total debt is composed of bonds issued in both the short- and long-term public capital markets and non-public debt.
Public debt totals $134.6 billion, primarily consisting of bonds issued in the domestic and international
long-term public markets in 11 currencies. Ontario also has $22.5 billion outstanding in non-public debt issued
in Canadian dollars. Non-public debt consists of non-marketable debt instruments issued to public-sector pension
funds and government agencies, including the Canada Pension Plan (CPP).
Debt Management
The Province mitigates the financial risks associated with its capital market activities by adhering to prudent
risk management policies and exposure limits.
The Province limits itself to a maximum interest rate resetting exposure of 35 per cent of debt issued for
Provincial purposes and a maximum foreign exchange exposure of five per cent of debt issued for Provincial
purposes. In fiscal 2006-07, the interest rate resetting exposure policy limit was increased from 25 per cent to
allow the Province to take advantage of lower floating rates.
All exposures remained well below policy limits in fiscal 2006-07.
[Chart 4: Total Debt Composition $157.1 billion]
[Chart 5: Interest Rate Resetting Exposure]
[Chart 6: Foreign Exchange Exposure]
Debt Maturities
The most significant component of the borrowing program is the refinancing of maturing debt. The OFA will
continue to aim for a balanced maturity profile and take advantage of opportunities to schedule maturities into
years that currently have lower levels of maturing debt.
[Chart 7: Debt Maturities]
Cost of Debt
The effective interest rate (on a weighted-average basis) on total debt is estimated to be 6.02 per cent as at
March 31, 2007 (March 31, 2006, 6.14 per cent). For comparison, as at March 31, 1993, the effective interest rate
on total debt was 10.14 per cent.
As at March 31, 2007, the effective interest rate on public debt is estimated at 5.48 per cent (5.52 per cent as at
March 31, 2006), compared to an estimated 9.24 per cent on non-public debt (9.49 per cent as at March 31, 2006).
Until May 2006, the Bank of Canada continued to increase its benchmark target for the overnight interest rate.
The overnight rate has not changed since that time as economic growth has moderated. Long-term rates remain near
their lowest level in 50 years, resulting in a flatter yield curve.
[Chart 8: Effective Interest Rate (Weighted Average) of Debt]
Net Debt-to-GDP
Net debt-to-GDP peaked at 32.9 per cent in 1999-2000, the year the Province first consolidated the unfunded
liability (or "stranded debt") of the OEFC. Since then, Ontario's net debt-to-GDP ratio has trended downward,
declining from 26.4 per cent in 2005-06 to 25.9 per cent in 2006-07. The current outlook projects a ratio of
25.5 per cent in 2007-08, 24.6 per cent in 2008-09 and 23.9 per cent in 2009-10.
[Chart 9: Net Debt-to-GDP]
Consolidated Financial Tables
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Net Debt and Accumulated Deficit Table 3
Interim 2007 ($ Millions)
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Interim Plan
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
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Debt(1)
Publicly Held Debt
Bonds(2) 102,958 116,732 125,279 123,129 128,682 134,948
Treasury Bills 6,274 3,359 3,747 5,215 4,398 4,948
U.S. Commercial Paper(2) 1,515 1,156 269 706 195 195
Ontario Infrastructure Projects
Corporation - 323 1,288 1,323 1,273 2,693
(OIPC)(3)
Other 438 422 404 387 - -
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111,185 121,992 130,987 130,760 134,548 142,784
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Non-Public Debt
Canada Pension Plan Investment Fund 10,746 10,233 10,233 10,233 10,233 10,233
Ontario Teachers' Pension Fund 10,387 9,487 8,666 7,596 6,411 4,466
Public Service Pension Fund 3,200 3,052 2,886 2,705 2,501 2,260
Ontario Public Service Employees'
Union Pension Fund (OPSEU) 1,520 1,450 1,371 1,285 1,188 1,073
Canada Mortgage and Housing 1,078 1,047 1,003 960 913 864
Corporation
Other(4) 356 1,096 1,231 1,367 1,308 1,289
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27,287 26,365 25,390 24,146 22,554 20,185
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Total Debt 138,472 148,357 156,377 154,906 157,102 162,969
Cash and Temporary Investments (7,252) (8,139) (13,422) (6,258) (5,726) (5,750)
Other Net (Assets)/Liabilities(5) 1,427 (1,089) (769) (5,398) (7,240) (9,367)
OIPC Net (Assets)/Liabilities(3) - (313) (1,265) (1,322) (1,111) (2,538)
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Net Debt 132,647 138,816 140,921 141,928 143,025 145,314
Non-Financial Assets(6) (13,942) (14,628) (15,178) (32,773) (34,180) (36,069)
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Accumulated Deficit(7) 118,705 124,188 125,743 109,155 108,845 109,245
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(1) Includes debt issued by the Province and Government Organizations, including the OEFC.
(2) All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts.
(3) OIPC's interim 2006-07 debt is composed of Ontario Opportunity Bonds ($323 million), Infrastructure Renewal Bonds
($650 million) and short-term commercial paper ($300 million). OIPC's debt is not guaranteed by the Province. OIPC Net
(Assets)/Liabilities include cash, temporary investments, accounts receivable, loans receivable, debt issue costs,
accounts payable and loans payable.
(4) Other non-public debt includes Ontario Municipal Employees Retirement Fund, College of Applied Arts and Technology
Pension Plan, Ryerson Retirement Pension Plan, Ontario Immigrant Investor Corporation and indirect debt of school
boards (the indirect debt of school boards was incurred in June 2003 to refinance the non-permanently financed debt
of 55 school boards; an equivalent amount is included in Net Assets as advance payments to school boards).
(5) Other Net (Assets)/Liabilities include accounts receivable, loans receivable, advances and investments in government
business enterprises, accounts payable, accrued liabilities, pensions and the liability for power purchase agreements
with non-utility generators.
(6) Non-financial assets include the Province's tangible capital assets and net assets of hospitals, school boards and
colleges, which, starting with fiscal year 2005-06, are consolidated using one-line consolidation.
(7) Accumulated deficit represents net debt adjusted for non-financial assets. Starting with 2005-06, accumulated deficit
includes the opening combined net assets of hospitals, school boards and colleges.
Source: Ontario Ministry of Finance.
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Debt Maturity Schedule Table 4
Interim 2007 ($ Millions)
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Currency
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Interim
Canadian U.S. Japanese Other 2006-07 2005-06
Dollar Dollar Yen Euro(1) Currencies(2) Total Total
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Fiscal Year Payable
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Year 1 13,371 5,390 320 - 223 19,304 21,421
Year 2 15,083 4,095 - 795 265 20,238 14,019
Year 3 9,068 1,628 714 1,443 870 13,723 19,416
Year 4 6,195 - - - 252 6,447 13,115
Year 5 5,956 1,136 - - 47 7,139 6,254
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1-5 years 49,673 12,249 1,034 2,238 1,657 66,851 74,225
6-10 years 23,222 7,607 99 1,188 2,018 34,134 29,980
11-15 years 6,424 - - - - 6,424 4,694
16-20 years 12,300 - - - - 12,300 11,766
21-25 years 13,606 - - - - 13,606 12,843
26-40 years(3) 23,787 - - - - 23,787 21,398
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Total(4) 129,012 19,856 1,133 3,426 3,675 157,102 154,906
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Debt Issued
for Provincial
Purposes 104,060 16,562 1,133 3,426 2,748 127,929 125,550
OEFC Debt 23,679 3,294 - - 927 27,900 28,033
OIPC Debt 1,273 - - - - 1,273 1,323
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Total(5) 129,012 19,856 1,133 3,426 3,675 157,102 154,906
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(1) Euro includes debt issued in Euro and French franc legacy currency.
(2) Other Currencies comprise Australian dollar, New Zealand dollar, Pound sterling, Swiss franc, Hong Kong dollar,
South African rand and Turkish lira.
(3) The longest term to maturity is to June 2, 2047.
(4) Total foreign currency denominated debt as at March 31, 2007 is $28.1 billion (2006, $27.4 billion). Of that,
$27.1 billion or 96.4 per cent (2006, $26.3 billion or 95.9 per cent) was fully hedged to Canadian dollars.
(5) Total debt includes issues totalling $2.7 billion (2006, $4.8 billion) that have embedded options exercisable
by either the Province or the bondholder under specific conditions.
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Medium-Term Outlook Table 5
Net Debt and Accumulated Deficit ($ Billions)
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2008-09 2009-10
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Total Debt 167.1 171.1
Cash and Temporary Investments (5.8) (5.8)
Other Net (Assets)/Liabilities (10.9) (11.7)
OIPC Net (Assets)/Liabilities (3.4) (4.4)
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Net Debt 147.0 149.2
Non-Financial Assets (38.1) (40.6)
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Accumulated Deficit 108.9 108.6
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Note: Numbers may not add due to rounding.
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Derivative Financial Instruments
The table below presents a preliminary maturity schedule of the Province and the OEFC's derivative financial
instruments, by type, based on the notional amounts of the contracts. Notional amounts represent the face value
of outstanding derivative contracts and do not reflect credit or market risk, or actual cash flows.
Derivatives are financial contracts, whose value is derived from underlying instruments. The Province uses
derivatives to hedge and minimize interest costs. Hedges are created primarily through swaps, which are an
exchange of payment streams between two counterparties. Swaps allow the Province to offset existing obligations,
effectively converting them into obligations with more desirable financial characteristics. Other derivative
instruments used by the Province include forward foreign exchange contracts, forward rate agreements, futures,
options, caps and floors.
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Derivative Portfolio Notional Value Table 6
Interim 2007 ($ Millions)
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Over Interim
Maturity in 6-10 10 2006-07 2005-06
Fiscal Year 2007-08 2008-09 2009-10 2010-11 2011-12 Years Years Total Total
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Swaps:
Interest rate 13,743 12,204 8,743 2,111 2,553 24,441 4,470 68,265 64,735
Cross currency 6,113 5,304 5,736 503 1,232 12,508 - 31,396 28,435
Forward foreign
exchange contracts 972 - - - - - - 972 3,639
Caps and floors 50 - 88 - - - - 138 532
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Total 20,878 17,508 14,567 2,614 3,785 36,949 4,470 100,771 97,341
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