DBRS Confirms Ontario School Boards Financing Corporation at AA (low), Stable Trend

DBRS has today confirmed the ratings of the Ontario School Boards Financing Corporation (OSBFC) at AA (low) with a Stable trend. The OSBFC’s rating is closely tied to that of the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS) given the importance of provincial funding as a source of revenue and debt servicing and the strong provincial oversight, which requires school boards to maintain balanced operating budgets and to seek provincial approval for new borrowing and capital projects. DBRS also notes that OSBFC has a policy that requires boards to pre-pay debt servicing to the custodian ten days ahead of schedule, which gives OSBFC the ability to cover for school boards in the event of a missed payment and avoid default.

There has been no new debt series issued since June 2007, and based on DBRS’s latest review, the credit profiles maintained by the 30 school board participants remain adequate for the rating. The Province has made significant structural changes to the provincial capital funding model in recent years. Most recently in 2010-11, the Province initiated a capital funding wrap-up and moved to replace the bulk of enrolment-sensitive capital funding with unconditional grants for debt servicing. The main implications of these changes are that much of the enrolment risk pertaining to capital funding used by school boards to service OSBFC debt has effectively been uploaded to the Province, with only renewal funding, used by some boards to service a small portion of debt, still based on enrolment.

The changes also restrict school boards from issuing debt on their own as the Province, through the Ontario Financing Authority (OFA), will now finance school boards’ long-term capital projects. In addition to a persistent trend of declining enrolment, these changes were largely motivated by accounting rule changes that consolidated the sector with the Province’s financial statements. Consequently, the financial autonomy of school boards has been constrained considerably and decision making centralized at the provincial level, thereby providing meaningful protection to OSBFC bondholders.

That said, DBRS will continue to monitor the few school boards that still rely on enrolment-sensitive renewal funding for the servicing of their debt not supported by prior capital funding. Careful attention will be paid to school boards with debt service coverage ratios (DSCRs) below 1.0 times (x). In 2010-11, 11 OSBFC school boards had some unsupported debt, and of these, two school boards posted a DSCR that demonstrated some weakness. However, the projects underpinning this unsupported debt and a reasonable plan to fund the debt level provide the Province and DBRS with comfort that these school boards, like the other OSBFC members, will be able to manage their debt obligations.

With the recent changes to the funding formula, DBRS views the credit risk profile of OSBFC as even more strongly linked to that of the Province. Consequently, DBRS believes the Province’s challenging fiscal circumstances will lead to continued tightness in funding conditions for school boards. As such, further deterioration in the Province’s financial situation could have rating implications for OSBFC debt.

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

DBRS ratings of OSBFC are primarily based on the provincial framework for funding operations and capital needs of school boards, the tight provincial oversight of school board finances, the ability of participating school boards to meet debt servicing obligations and the structure of the issuing entity.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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