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

DBRS Limited (DBRS Morningstar) confirmed the 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 (low) with Stable trends. While not guaranteed by the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar), the ratings reflect (1) the strong linkage to the Province as the primary source of school board revenues used to service OSBFC debt, (2) the importance of education as a public policy priority, and (3) the strong oversight and monitoring of school boards by the Ontario Ministry of Education.

The Coronavirus Disease (COVID-19) pandemic presented considerable operational and financial challenges for school boards in Ontario, including sizable enrolment declines for some. However, DBRS Morningstar does not anticipate that school boards with outstanding OSBFC obligations will experience significant financial deterioration in 2022–23. This view is supported by ongoing expense management by school boards as well as extraordinary funding and other supports that were extended by the provincial government to offset softer enrolment and pandemic-driven costs and to drive learning recovery.

The credit profile of OSBFC 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. The school board funding formula in Ontario is largely enrolment based, although it 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, while most legacy debt is supported by dedicated debt service grants to maturity.

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

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. Additionally, 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is General Corporate Methodology: Appendix 2 – Ontario School Boards Financing Corporation (April 30, 2021; https://www.dbrsmorningstar.com/research/377784), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577