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Historical Perspective on British Columbia’s Credit Rating

Historical Perspective on British Columbia’s Credit Rating. Presentation to Financial Management Institute June 18, 2008. Outline Who are credit rating agencies? Claim to power and influence What is a credit rating? What factors comprise a government rating?

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Historical Perspective on British Columbia’s Credit Rating

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  1. Historical Perspective on British Columbia’s Credit Rating Presentation to Financial Management InstituteJune 18, 2008

  2. 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

  3. Who are credit rating agencies? • Three major agencies • History • Business model • Issuer-pay business 3

  4. 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

  5. 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

  6. Weightings Assigned to Credit Factors by Moody’s(Regional and Local Governments Outside the US) Source: Moody’s International, “Rating Methodology” 6

  7. Differences among rating agencies? • Rating methodology • Subjective assessment • Treatment of Key Factors 7

  8. British Columbia’s Current Credit Ratings Moody’s: AAA Standard & Poor’s: AAA Dominion Bond Rating Service: AA(high) Fitch Ratings AAA 8

  9. Credit Rating History(Moody’s, S&P, DBRS) AAA AA+ AA AA- A+ Source: Ministry of Finance 9

  10. Factors that lead to downgrades: 1997-1999 • 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 10

  11. 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

  12. Relationship Between GDP Growth & Credit Rating Adjustments (As at March 31) AAA AAA AA+ AA+ AA AA AA- AA- A+ A+ (Estimate) Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 - 2010/11 12

  13. Relationship Between Personal Income Per Capita Growth & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 13

  14. Relationship Between Personal Income Per Capita & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 14

  15. Relationship between Tax-payer Supported Debt Service Cost as a % of Tax-payer Supported Revenue & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11 15

  16. Relationship Between Tax-payer Supported Debt as a % of GDP & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 16

  17. Relationship Between Taxpayer Supported Debt as % of Total Revenue & Credit Rating Adjustments (As at March 31) AAA AA+ AA AA- A+ (Estimate) Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11 17

  18. Relationship Between Tax-payer Supported Debt Per Capita & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11 18

  19. Relationship Between Consolidated Surplus/Deficit & Credit Rating Adjustments (As at March 31) (Estimate) AAA AA+ AA AA- A+ * Excludes financial position of Schools, Universities, Colleges and Hospitals prior to 1998/99 Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 19

  20. Actual vs Budgeted Surplus/Deficit (As at March 31) Standard & Poor’s Upgrades: AAA AA+ AA AA- A+ Source: Ministry of Finance 20

  21. Other Credit Factors • Liquidity • Debt Management • Pension fund management • Transparent reporting • Consistent track record 21

  22. Managing Credit Rating Agency Relationships • No surprises • Consistent track record • Annual reviews and routine communications 22

  23. Borrowing Spreads - BC relative to Ontario (10 Year Bond) Standard & Poor’s Upgrades: Source: Ministry of Finance 23

  24. Borrowing Spreads - BC relative to Ontario (30 Year Bond) Standard & Poor’s Upgrades: Source: Ministry of Finance 24

  25. 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

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