With twice the debt of California, Ontario is now the world’s most indebted sub-sovereign borrower
Ontario, the world’s most indebted sub-sovereign borrower, is ploughing ahead with Canada’s most ambitious infrastructure plan — risking the censure of Standard & Poor’s and underperformance for its $307 billion of bonds.
The nation’s most-populous province is keeping a goal of spending $130 billion over the next decade on work such as roads and mass transit in Toronto even after S&P dropped its credit grade this month to the lowest level ever. Yield spreads on some of the province’s debt reached the widest since January after the ratings move.
Ontario, with about 13.7 million residents, wants to carry out some of the projects using public-private partnerships, or P3s, an approach it used to build the athlete’s village for this month’s Pan Am Games in Toronto. While bringing in the private sector may reduce risk or speed up work, Ontario would still have to borrow for the financing.
“It’s not free debt,” Mario Angastiniotis, an analyst at S&P in Toronto, said by phone Thursday. “The P3 is just an alternative vehicle for financing, it’s not a different way that doesn’t cost you anything. You’re still adding to your debt.”
While Ontario’s population is about one third of California’s, its debt load is more than double that of the biggest U.S. state.
S&P cut Ontario one step on July 6 to A+, the fifth-highest level. The company cited infrastructure spending that will lead to a “very high” 267 per cent debt-to-revenue level in the next two years.
P3s are “an innovative way of financing and procuring large, complex public infrastructure projects,” said Andrew Forgione, a spokesman for Brad Duguid, minister of economic development, employment, and infrastructure. “It makes the best use of private-sector resources and expertise to provide on- time, on-budget project delivery.”
In the last nine years, Ontario has financed 75 major projects using the method, including the Union-Pearson Express train linking Toronto’s largest airport to the downtown financial corridor of Bay Street. Officials also worked with private developers on the Pan Am games venues and athletes’ village, where about 10,000 competitors are staying.
Malcolm Jones is one investor who pulled out of Ontario bonds after the Liberal Party unveiled a fiscal plan in 2014 that increased spending and swelled the deficit. While he bought 10-year Ontario debt in the last year to diversify his holdings, he’s still underweight.
“They’re going to keep going down this path, they’re committed to it,” Jones, who oversees $500 million as head of fixed income at Adroit Investment Management Ltd., said on Friday from Edmonton, Alberta. “At least now it’s more in the price” after the downgrade.
The extra yield that investors demand to own Ontario’s 10-year bonds instead of federal debt has risen about 0.06 percentage point in the past three months, to about 0.77 percentage point, data compiled by Bloomberg show. It reached 0.79 percentage point the week of the downgrade, the most since January.
“You’ve already accumulated large deficits,” S&P’s Angastiniotis said. “Now the additional spending over the next 10 years, if it’s financed through debt, it’s obviously going to run up the debt burden, which would contribute to further deterioration in the credit.”