Download Slide 1

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?
• 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)
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%
Source: Moody’s International, “Rating Methodology”
6
Differences among rating agencies?
• Rating methodology
• Subjective assessment
• Treatment of Key Factors
7
British Columbia’s Current Credit Ratings
Moody’s:
AAA
Standard & Poor’s:
AAA
Dominion Bond Rating Service:
AA(high)
Fitch Ratings
AAA
8
Credit Rating History
(Moody’s, S&P, DBRS)
6
AAA 5
AA+ 4
DBRS
AA 3
S&P
Moody's
AA- 2
A+ 1
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
Source: Ministry of Finance
9
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
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
Relationship Between GDP Growth & Credit Rating Adjustments
(As at March 31)
6
5.00%
4.50%
AAA
AAA5
4.00%
S&P
3.50%
AA+
AA+4
3.00%
AA
AA 3
2.50%
Moody's
DBRS
2.00%
AAAA-2
1.50%
1.00%
A+
A+ 1
0.50%
(Estimate)
0.00%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
GDP Growth
(Annual
Change)
Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan
2008/09 - 2010/11
12
Relationship Between Personal Income Per Capita Growth
& Credit Rating Adjustments
(As at March 31)
(Estimate)
6
7.00%
AAA 5
6.00%
5.00%
DBRS
S&P
AA+ 4
4.00%
AA 3
3.00%
Moody's
AA- 2
2.00%
08
Personal
income per
capita
(Annual
Change)
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
19
19
19
19
93
0.00%
92
0
91
1.00%
90
A+ 1
Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan
2008/09 to 2010/11
13
Relationship Between Personal Income Per Capita
& Credit Rating Adjustments
(As at March 31)
(Estimate)
6
$36,000.00
DBRS
$34,000.00
AAA 5
$32,000.00
AA+ 4
$28,000.00
Moody's
$26,000.00
AA- 2
$24,000.00
A+ 1
$22,000.00
Personal
Income Per
Capita
($CAD)
07
08
20
20
06
20
05
20
03
02
04
20
20
20
01
20
00
20
98
99
19
19
97
19
96
19
94
93
95
19
19
19
19
19
92
$20,000.00
91
0
90
Income
AA 3
19
S&P
$30,000.00
Year
Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan
2008/09 to 2010/11
14
Relationship between Tax-payer Supported
Debt Service Cost as a % of Tax-payer Supported Revenue & Credit Rating
Adjustments
(As at March 31)
(Estimate)
6
9.00%
DBRS
8.00%
AAA5
7.00%
S&P
AA+ 4
6.00%
5.00%
AA 3
4.00%
AA- 2
3.00%
2.00%
A+ 1
1.00%
08
Taxpayer
Supported
Debt as a
% of
Revenue
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
0.00%
19
95
0
19
Moody's
Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11
15
Relationship Between Tax-payer Supported Debt as a % of GDP
& Credit Rating Adjustments
(As at March 31)
(Estimate)
6
25.00%
AAA5
20.00%
DBRS
AA+4
15.00%
S&P
AA 3
10.00%
AA- 2
Moody's
5.00%
A+ 1
0.00%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
Taxpayer
Supported Debt
as a % of GDP
Year
Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan
2008/09 to 2010/11
16
Relationship Between Taxpayer Supported Debt
as % of Total Revenue & Credit Rating Adjustments
(As at March 31)
6
120%
AAA 5
100%
DBRS
AA+ 4
80%
S&P
AA
3
60%
Moody's
AA-
2
40%
Debt as % of
Revenue
A+
1
20%
(Estimate)
0%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11
17
Relationship Between Tax-payer Supported Debt Per Capita
& Credit Rating Adjustments
(As at March 31)
(Estimate)
6
$7,500.00
AAA 5
$7,000.00
DBRS
$6,500.00
AA+
S&P
4
$6,000.00
AA
3
$5,500.00
AA-
2
$5,000.00
A+
Moody's
1
$4,500.00
0
19
95
Tax-payer
Supported
Debt Per
Capita
$4,000.00
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Source: BC Public Accounts (1997-2007) & Budget and Fiscal Plan 2008/09 to 2010/11
18
Relationship Between Consolidated Surplus/Deficit & Credit Rating
Adjustments
(As at March 31)
(Estimate)
$5,000.00
6
AAA
AA+
AA
AA-
$3,000.00
4
$2,000.00
$1,000.00
3
$0.00
2
-$1,000.00
A+ 1
-$2,000.00
Surplus/Deficit (C$ Millions)
$4,000.00
5
DBRS
S&P
Moody's
Consolidated
Surplus/Deficit
-$3,000.00
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
* 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
Actual vs Budgeted Surplus/Deficit
(As at March 31)
Standard & Poor’s Upgrades:
6
$5,000.00
$4,000.00
AAA5
$3,000.00
$2,000.00
AA+4
$1,000.00
AA
3
Budget Forecast
$0.00
-$1,000.00
AA- 2
A+
DBRS
Consolidated
Surplus/Deficit
-$2,000.00
-$3,000.00
1
-$4,000.00
0
a
M
2
r-0
-$5,000.00
a
M
3
r-0
a
M
4
r-0
a
M
5
r-0
a
M
6
r-0
a
M
7
r-0
a
M
8
r-0
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
Borrowing Spreads - BC relative to Ontario (10 Year Bond)
Standard & Poor’s Upgrades:
15.00
10.00
5.00
Spreads (BPS)
0.00
-5.00
-10.00
-0
8
Ja
n
-0
7
Ja
n
-0
6
Ja
n
-0
5
Ja
n
-0
4
Ja
n
-0
3
Ja
n
-0
2
Ja
n
-0
1
Ja
n
Ja
n
-0
0
-15.00
Source: Ministry of Finance
23
Borrowing Spreads - BC relative to Ontario (30 Year Bond)
Standard & Poor’s Upgrades:
15.00
10.00
5.00
Spread (BPS)
0.00
-5.00
-10.00
-15.00
8
Ja
n0
7
Ja
n0
6
Ja
n0
5
Ja
n0
4
Ja
n0
3
Ja
n0
2
Ja
n0
1
n0
Ja
Ja
n0
0
-20.00
Source: Ministry of Finance
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