Historical Perspective on British Columbia’s Credit Rating

Historical Perspective on British Columbia’s Credit Rating

Presentation to Financial Management InstituteJune 18, 2008

Outline

• Who are credit rating agencies?

• Claim to power and influence

• What is a credit rating?

• What factors comprise a government rating?

• Differences among rating agencies

• British Columbia’s recent experience

• Challenges posed by credit rating agencies

2

Who are credit rating agencies?

• Three major agencies

• History

• Business model

• Issuer-pay business

3

What is their claim to power and influence in the financial community?

• Globalization, new financial products

• Defines issuer access to investors

• Materially influences borrowing costs

• Measure of reputation and standing

• Oligopoly among a few agencies

• Light regulation

4

What is a credit rating?

• It is not investment advice

• It is not a market valuation

• It is an assessment of credit risk

• Incorporates assessments of historical data and performance and future outlook

5

Weightings Assigned to Credit Factors by Moody’s(Regional and Local Governments Outside the US)

Source: Moody’s International, “Rating Methodology”

        Advanced Industrial Countries:  

  Operating Environment     50.00%    

  Institutional Framework     10.00%    

  Financial Position & Performance   10.00%    

  Debt Profile       10.00%    

  Governance & Management Factors   10.00%    

  Economic Fundamentals     10.00%    

6

Differences among rating agencies?

• Rating methodology

• Subjective assessment

• Treatment of Key Factors

7

Moody’s: AAA

Standard & Poor’s: AAA

Dominion Bond Rating Service: AA(high)

Fitch Ratings AAA

British Columbia’s Current Credit Ratings

8

0

1

2

3

4

5

6

DBRS

S&P

Moody's

AAA

AA+

AA

AA-

A+

Credit Rating History(Moody’s, S&P, DBRS)

Source: Ministry of Finance 9

- Weak economic performance

- Widening budgetary imbalance expected (expansionary fiscal policy)

- Deferral of balanced budget

- Fiscal targets not being met

- High relative taxes and spending pressures reduce fiscal flexibility

- Debt to GDP almost doubled over seven years

Source: Credit rating agency credit reports on British Columbia

Factors that lead to downgrades: 1997-1999

10

Factors that lead to upgrades: 2004-2007

- Track record of surpluses and lower debt burden (larger than expected)

- Expectations of future balanced budgets or surpluses

- Expectation of a decline in the debt burden

- Fiscal room to manoeuvre in case of unanticipated fiscal pressures

- Solid economic performance despite strong headwinds in some years

- Competitive provincial tax system

- Favourable assessment of economic forecasts

- Public sector pension plan governance

- Enhanced transparency

- Successful management of infrastructure procurement

- Access to liquidity (eg. domestic and international investors)

Source: Credit rating agency credit reports on British Columbia 11

0

1

2

3

4

5

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

S&P

Moody's

DBRS

GDP Growth(AnnualChange)

AAA

AA+

AA

AA-

A+

Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 - 2010/11

Relationship Between GDP Growth & Credit Rating Adjustments

(Estimate)

(As at March 31)

AAA

AA+

AA

AA-

A+

12

0

1

2

3

4

5

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%DBRS

S&P

Moody's

Personalincome percapita(AnnualChange)

Relationship Between Personal Income Per Capita Growth & Credit Rating Adjustments

Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11

(Estimate)

AAA

AA+

AA

AA-

A+

(As at March 31)

13

0

1

2

3

4

5

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Year

$20,000.00

$22,000.00

$24,000.00

$26,000.00

$28,000.00

$30,000.00

$32,000.00

$34,000.00

$36,000.00

Inco

me

DBRS

S&P

Moody's

PersonalIncome PerCapita($CAD)

Relationship Between Personal Income Per Capita & Credit Rating Adjustments

AAA

AA+

AA

AA-

A+

Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11

(Estimate)

(As at March 31)

14

0

1

2

3

4

5

6

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00% DBRS

S&P

Moody's

TaxpayerSupportedDebt as a% ofRevenue

Relationship between Tax-payer Supported Debt Service Cost as a % of Tax-payer Supported Revenue & Credit Rating

Adjustments

AAA

AA+

AA

AA-

A+

Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11

(Estimate)

(As at March 31)

15

0

1

2

3

4

5

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Year

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

DBRS

S&P

Moody's

TaxpayerSupported Debtas a % of GDP

Relationship Between Tax-payer Supported Debt as a % of GDP & Credit Rating Adjustments

AAA

AA+

AA

AA-

A+

(Estimate)

Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11

(As at March 31)

16

0

1

2

3

4

5

6

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0%

20%

40%

60%

80%

100%

120%

DBRS

S&P

Moody's

Debt as % ofRevenue

Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11

AAA

AA+

AA

AA-

A+

(Estimate)

Relationship Between Taxpayer Supported Debt as % of Total Revenue & Credit Rating Adjustments

(As at March 31)

17

0

1

2

3

4

5

6

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$4,000.00

$4,500.00

$5,000.00

$5,500.00

$6,000.00

$6,500.00

$7,000.00

$7,500.00

DBRS

S&P

Moody's

Tax-payerSupportedDebt PerCapita

Relationship Between Tax-payer Supported Debt Per Capita & Credit Rating Adjustments

Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11

(Estimate)

AAA

AA+

AA

AA-

A+

(As at March 31)

18

0

1

2

3

4

5

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-$3,000.00

-$2,000.00

-$1,000.00

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

Su

rplu

s/D

efi

cit

(C

$ M

illio

ns

)

DBRS

S&P

Moody's

ConsolidatedSurplus/Deficit

Relationship Between Consolidated Surplus/Deficit & Credit Rating Adjustments

Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11

(Estimate)

AAA

AA+

AA

AA-

A+

(As at March 31)

* Excludes financial position of Schools, Universities, Colleges and Hospitals prior to 1998/99

19

Actual vs Budgeted Surplus/Deficit(As at March 31)

0

1

2

3

4

5

6

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

-$5,000.00

-$4,000.00

-$3,000.00

-$2,000.00

-$1,000.00

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

DBRS

Budget Forecast

ConsolidatedSurplus/Deficit

AAA

AA+

AA

AA-

A+

Standard & Poor’s Upgrades:

Source: Ministry of Finance

20

Other Credit Factors

• Liquidity

• Debt Management

• Pension fund management

• Transparent reporting

• Consistent track record

21

Managing Credit Rating Agency Relationships

• No surprises

• Consistent track record

• Annual reviews and routine communications

22

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Spreads (BPS)

Borrowing Spreads - BC relative to Ontario (10 Year Bond)

Standard & Poor’s Upgrades:

Source: Ministry of Finance

23

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Spread (BPS)

Standard & Poor’s Upgrades:

Source: Ministry of Finance

Borrowing Spreads - BC relative to Ontario (30 Year Bond)

24

Challenges Posed by Credit Rating Agencies

• Most acute in corporate sector

• Business Model

• Blurred Accountabilities

• Regulatory Oversight

• Generally a lagging indicator

• Sophisticated investors look for alternatives

25