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Rating Action:

Moody's Affirms Ontario's Aa2 Ratings, Changes Outlook to Stable

Global Credit Research - 26 Apr 2016

Toronto, April 26, 2016 -- Moody's Investors Service today affirmed the Aa2 issuer and long-term debt ratings assigned to the Province of Ontario, and revised the outlook on the ratings to stable from negative. The province's P-1 short-term rating was also affirmed.

RATINGS RATIONALE

The stable outlook reflects Moody's view that the province's debt burden will continue to modestly improve as the province moves towards balanced budgets and therefore reduces its annual financing requirements. After rising substantially following the financial crisis and recession of 2008-09, the province's net direct and indirect debt measured relative to revenues has stabilized. With the return to balanced budgets on the horizon, aided by continued expenditure control and increasing revenues, the debt burden is expected to show slight improvements over the medium-term as annual financing requirements decrease.

Despite a planned increase in total debt over the medium-term as the province finances an ambitious infrastructure spending program, debt accumulation should be such that the debt relative to revenues improves over the medium-term. Although the province forecasts only thin surpluses in the years immediately following the planned return to balance in 2017/18, Ontario has included some contingencies to help ensure it achieves its fiscal targets and therefore reduce the likelihood of incurring further deficits.

"The stable outlook on the Province of Ontario's ratings reflects our opinion that the province has presented a budget plan with little risk that the debt burden will exceed recent levels," said Michael Yake, Moody's Vice President and lead analyst for the Province of Ontario. "While we remain highly attentive to the province's elevated debt burden, our current forecasts are for it to fall marginally across the medium-term and, as importantly, for interest expense to remain manageable as well."

Moody's forecasts that the province's net direct and indirect debt will reach 237% of revenues in 2016/17, which is expected to be slightly lower than the estimated 240% for 2015/16. While Moody's notes that the debt burden is high compared to other Aa2-rated peers, and remains an important credit weakness for the rating, this debt burden is offset by a manageable level of adjusted interest expense relative to revenues.

The Aa2 rating reflects the high degree of fiscal flexibility inherent in the institutional framework governing the way Canadian provinces operate, which allows Ontario to sustain a relatively high debt burden compared to peers. The current low interest rate environment has enabled the province to extend the maturity of its debt profile and issue long-term debt bearing historically low coupons which has also kept debt service low and manageable. While the proportion of revenues consumed by interest payments is expected to increase as interest rates rise, current forecasts indicate that it should remain below 10% of revenue, a manageable level given the province's fiscal flexibility. Moreover, the province's large and diversified economy and growing population provides access to a broad and productive tax base and, as such, remains a source of credit strength.

WHAT COULD CHANGE THE RATING UP/DOWN

If a reversal in the downward trend of the province's debt burden were to occur, or similarly, if interest expense relative to revenue were to rise faster than currently forecasted, the rating would face downward pressure. Conversely, a significant reduction in the province's debt burden and interest expense would exert upward pressure on the rating.

The principal methodology used in this rating was Regional and Local Governments published in January 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Yake
Vice President - Senior Analyst
Sub-sovereign Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

David Rubinoff
MD - Sub-Sovereigns
Sub-sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

No Related Data.
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