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

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.

OMERS delivered a negative 2.7% net fund return in 2020, underperforming its benchmark return of 6.9%, which is mainly attributable to the impact of the Coronavirus Disease (COVID-19) pandemic on some investments in real estate, transportation, and entertainment, as well as foreign exchange losses driven by the reduction in foreign currency hedging positions combined with an appreciation of the Canadian dollar. Public investments generated a negative return of 3.1%. Within this asset class, public equities gained 1.5%, bonds gained 1.1%, and credit investment generated a loss of 4.3%. Within private investments, private equity, infrastructure, and real estate generated negative 8.4%, positive 8.6%, and negative 11.4% returns, respectively. Net investment income of negative $3.0 billion reduced net assets to $104.2 billion as at December 31, 2020 (excluding the Retirement Compensation Arrangement and the Additional Voluntary Contributions component). The Plan’s funding deficit decreased to $3.2 billion as at YE2020 on a going-concern basis.

MTN issuance increased debt with recourse to the Fund to $11.2 billion from $7.0 billion, equivalent to 9.7% of adjusted net assets by YE2020, 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 one series of notes: USD 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, 2020. While OMERS is expected to continue to use leverage 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 remain within OMERS’ internal 10% limit over the long term.

OMERS continues with its 2025 Strategy, a multiyear plan that is focused on several priorities. The strategy addresses plan maturity, longer life expectancy, and decreasing investment return expectations; changing demographics and workplace trends; diversification of investments globally; and incorporation of environmental, social, and governance (ESG) factors. OMERS adopts specific governance and risk management practices with a fundamental focus on funding risk to achieve the objectives of the strategy.

The rating includes additional analysis of the Fund’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar Sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios - June 2021 Update.” For details, see https://www.dbrsmorningstar.com/research/380281. 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.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 30, 2021), 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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