Historical Perspective on British Columbias Credit Rating Presentation to Financial Management...
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Transcript of Historical Perspective on British Columbias Credit Rating Presentation to Financial Management...
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