DBRS Morningstar Confirms OMERS Administration Corporation at AAA and OMERS Finance Trust at AAA and R-1 (high)

DBRS Limited (DBRS Morningstar) confirmed the AAA Issuer Rating of OMERS Administration Corporation (OMERS or the Fund). DBRS Morningstar also confirmed the R-1 (high) ratings on the Canadian Commercial Paper (Canadian CP) and U.S. Commercial Paper (U.S. CP; collectively, with the Canadian CP, the CP) of OMERS Finance Trust (OFT), as well as the AAA rating on OFT’s Medium-Term Notes (MTNs). The trend on all ratings is Stable. DBRS Morningstar notes that the ratings on the CP and MTNs are predicated on the unconditional and irrevocable guarantees provided by OMERS on issuances. Despite the funding deficit in the OMERS Primary Pension Plan (the Plan), the ratings continue to be supported by the Fund’s high level of assets, low-recourse debt burden, large base of financially sound employers, and healthy demographic profile.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19) pandemic. The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame. The scenarios were updated on July 22, 2020. For details, see “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update. For the confirmed ratings, DBRS Morningstar considered impacts consistent with the moderate scenario in the referenced commentary in its analysis. While the extent and duration of the pandemic are uncertain, OMERS remains well positioned to meet short-term liquidity needs and longer-term liability obligations supported by strong governance structures and long-term investment horizons.

OMERS delivered an 11.9% net fund return in 2019, outperforming its benchmark return of 7.5%, which is particularly attributable to the strong public equity market and overall positive performance across all asset classes. Public equities delivered a positive 16.4% net return. Within private investments, infrastructure and real estate generated positive 8.7% and 8.3% returns, respectively. Net investment income of $11.4 billion drove net assets to $108.0 billion as at December 31, 2019 (excluding the Retirement Compensation Arrangement and the Additional Voluntary Contributions component). The Plan’s funding deficit decreased to $3.4 billion as at YE2019 on a going-concern basis.

MTN issuance increased debt with recourse to the Fund to $7.0 billion from $5.3 billion, equivalent to 6.1% of adjusted net assets by YE2019, below the internal, long-term 10.0% limit set by management and providing considerable room for cyclical fluctuations in asset values. Subsequent to the fiscal year end, OFT issued three series of notes: USD 1.0 billion MTNs, CAD 1.25 billion MTNs, and EUR 1.0 billion MTNs. OMERS maintains a credit facility as backup liquidity support for the CP programs, which meets the DBRS Morningstar criteria outlined in “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers.” DBRS Morningstar notes that the maximum authorized CP limit (Canadian and U.S. CP programs combined) remained at $5.0 billion. The limit on the credit facility used as backup liquidity support for the CP program was $3.75 billion (75% of the authorized CP limit) and remained undrawn as of December 31, 2019. While overall leverage is expected to increase as the Fund broadens its global reach in private market assets and seeks to capitalize on the low interest rate environment, DBRS Morningstar expects recourse debt to grow in a measured fashion.

In 2019, OMERS refreshed the 2020 Strategy (that has now become the 2025 Strategy), which addresses plan maturity and longer life expectancy, changing demographics and workplace trends, an uncertain investment climate, and technological developments. In addition, the 2025 Strategy will have an increased focus on Plan design and funding. In 2019, OMERS conducted an Asset-Liability Study, focusing on identifying an optimal long-term asset mix, and approved the new long-term asset mix.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 27, 2020), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), and North American Structured Finance Flow-Through Ratings (January 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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