Debt Management Branch & Capital Markets Funding for the Province of BC. May 2018

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David Reynold Joseph
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1 Debt Management Branch & Capital Markets Funding for the Province of BC May 2018

2 Agenda Overview of Debt Management Branch Domestic Provincial Bond Market Funding the Province 2

3 Branch Mandate To manage the debt liabilities of the Province to be at the lowest long run cost without taking on undue risk 3

4 Governance and Authority Authority defined in the Financial Administration Act Minister of Finance is fiscal agent for public sector Debt Management Branch is centralized borrowing authority Annual Borrowing OIC Risk Committee: Recommends risk policy parameters for debt portfolio management Monitors compliance/performance Recommends borrowing strategy 4

5 Debt Management Teams Risk & Performance Measurement Investment Dealers, Banks Reporting & Analysis Financial Reporting, Budgeting & Analysis, Accounting Policies & Controls Accounting Support Rating Agencies, Investors, Public, & Regulatory Bodies Liability Portfolio Management - Performance Benchmarks - Risk Parameters - Derivative Transactions - Arbitrage and Warehouse Program Internal Clients Corporate Relations & Portfolio Settlements Client Services - Borrowing Documentationand Programs - Debt Management Policy - Rating Agencies Corporate Relations Systems Management Operationsand Portfolio Settlements Outstanding Debt and Derivatives Cash flow Management - - Capital Markets Domestic & International Financing, short term and long term Banking Cash Management - 5

6 Risk and Performance Measurement Financial risk governance Risk and Performance Measurement team Risk Committee Risk policies and guidelines management of risk Debt Portfolio risk parameters indicators of risk exposure levels 6

7 Capital Markets Team Contact point with debt capital markets and money markets A conduit for the province to source ancillary services and information from the private sector Participate in strategic and tactical funding initiatives 7

8 Multiple Borrowing Programs Domestic Promissory Notes (Short-Term) Domestic Debt Issuance Program (DDIP) International US Commercial Paper (Short Term) Multi-currency Euro Debt Issuance Program (EDIP) - syndicated/non-syndicated issues US Global (US Shelf) Australian Medium Term Note Programme (AMTN) Renminbi China Domestic 8

9 Province of BC Credit Ratings Rating Agency Credit Rating Credit Trend Moody s Investor Service Aaa Stable Standard and Poor s AAA Stable Fitch AAA Stable Dominion Bond Rating Service AA (high) Stable 9

10 Domestic Bond Market 10

11 Canada Bond Market From May 1995 to May 2018 Canada Yields Domestic riskfree rates of return Overnight to 30- yr maturity terms Most liquid bonds in domestic capital market Benchmarks 11

12 Canada Bond Market as of May 2018 Yield Curves Shifts over time Supply & Demand Flight to Quality Duration & Investor Term Preference Benchmarks

13 Canada Bond Market as of May 2018 Yield Curves Shifts over time Supply & Demand Flight to Quality Duration & Investor Term Preference Benchmarks

14 Canada Bond Market as of May 2018 Yield Curves Shifts over time Supply & Demand Flight to Quality Duration & Investor Term Preference Benchmarks

15 Canada Bond Market as of May 2018 Yield Curves Shifts over time Supply & Demand Flight to Quality Duration & Investor Term Preference Benchmarks

16 Canadian Credit Markets as of May 2018 Yield Curves Pricing risk Credit quality Supply & demand Benchmarks Liquidity 16

17 Provincial Credit Markets as of May 2018 Credit Spreads Pricing over benchmarks Credit quality Supply & demand Benchmarks Liquidity 17

18 Provincial Credit Markets PROVINCIAL PRICING INPUT MATRIX Benchmarks 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Benchmark Canadas Can /21 Can Can Can 2 28 Can Can 5 37 Can Canada Yields Current Canada Curve (bps) Credit Spread 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Ontario Canada Mortgage Bonds British Columbia Alberta Saskatchewan Manitoba Québec New Brunswick Nova Scotia Prince Edward Island Newfoundland & Labrador Spread Matrix Relative spreads Spread pressure from other issuers Indicative issuance spread levels 18

Growth of the Canadian Bond Markets Significant growth in the Canadian fixedincome market in the last decade Pace of growth increased dramatically in 2007 with the onset of the Financial Crisis

19 Growth of the Canadian Bond Markets Significant growth in the Canadian fixedincome market in the last decade Pace of growth increased dramatically in 2007 with the onset of the Financial Crisis Government borrowings to new historically high levels in response to stimulus and infrastructure spending pressures, and tepid global economic recovery Gross issuance outpacing maturities Advantageously low interest rate levels to issue debt and extend duration Charts sourced from Bank of Canada Financial Statistics and RBC Capital Markets 19

Growth of the Canadian Bond Markets Domestic Public Sector Debt Outstanding $517 billion Canada Bonds $236 billion Canada Mortgage Bonds $286 billion

20 Growth of the Canadian Bond Markets Domestic Public Sector Debt Outstanding $517 billion Canada Bonds $236 billion Canada Mortgage Bonds $286 billion Ontario Bonds $151 billion Quebec Bonds $46 billion British Columbia Bonds Charts sourced from Bank of Canada Financial Statistics and RBC Capital Markets 20

21 Provincial Secondary Market Secondary Trading Volumes Public Sector bonds account for the lions share of secondary trading activity Ontario bonds account for roughly half of all provincial trading Quebec is the second most liquid provincial credit by trade volumes 21

22 Provincial Secondary Market Secondary Trading Volumes BC bonds are the fourth most actively traded provincial bonds Secondary flow in Alberta bonds has started outpacing that of BCs in the last couple years 22

Provincial Secondary Market Domestic and International Provincial Funding Share of Canadian provincial bonds issued domestically has decreased as international capital markets have become

23 Provincial Secondary Market Domestic and International Provincial Funding Share of Canadian provincial bonds issued domestically has decreased as international capital markets have become increasingly attractive Depth of international investors interest Pricing arbitrage (swap competitiveness) Accommodates large and growing aggregate funding needs Improved access to foreign sources of funding 23

24 Funding The Province 24

25 BC Gross Market Debt Outstanding as at February 28, 2018 Gross Debt Outstanding: $62.3 Billion 25

26 BC Bonds Outstanding as of May 2018 The province has been active in the international capital markets since the early 1980 s. C$10.7 billion (17.2%) of the Province s gross debt is denominated in foreign currencies (largely hedged back to C$) 26

27 BC Bond Issuance Issue Date Maturity Date Placement Market Term Issuing Currency Amount (millions) Years Issued Cdn$ Equivalent Private Euro 16 Euro Private Canada Pension Plan 20 CAD Public Australian 10 AUD Public Indian 3 INR Public Domestic 32 CAD Public Domestic 10 CAD Private Euro 10 Euro Public Domestic 10 CAD Public Australian 10 AUD Private Canada Pension Plan 20 CAD Public Domestic 30 CAD Public Domestic 10 CAD Public Domestic 30 CAD Public Panda 3 RMB Public Domestic 30 CAD Public Domestic 30 CAD Public Domestic 10 CAD $

Bond Issuance Syndicate Structures Sample Domestic Syndicate Province of British Columbia Syndicate Structure Domestic Public Bond Issue % - December 18, 2028 2018-05-12 Before Allocation of Total

00% National Bank Financial 10.00% Banking Group Desjardins Securities 5.00% Casgrain 4.00% BofA/Merrill 3.00% Laurentian Bank Securities 2.50% HSBC Securities 2.50% Canaccord Genuity Corp 1.

28 Bond Issuance Syndicate Structures Sample Domestic Syndicate Province of British Columbia Syndicate Structure Domestic Public Bond Issue % - December 18, Before Allocation of Total Allocation Lead Reserve the Reserve $ Scotia Capital Markets 20.00% Co-Leads TD Securities 15.00% RBC Capital Markets 15.00% Managers BMO Capital Markets 10.00% CIBC Capital Markets 10.00% National Bank Financial 10.00% Banking Group Desjardins Securities 5.00% Casgrain 4.00% BofA/Merrill 3.00% Laurentian Bank Securities 2.50% HSBC Securities 2.50% Canaccord Genuity Corp 1.00% Sample US / International Syndicate Province of British Columbia Syndicate Structure US$ Global Syndicate - BCUSG $1.25 Billion 10-Year Total Allocation Joint Leads/ Bookrunners Considerations 1.25 Bln HSBC Securities 21.00% 21.00% CIBC 21.00% 21.00% Scotia 21.00% 21.00% National 13.00% 13.00% Co-Managers Royal 6.00% 6.00% Merrill 6.00% 6.00% TD 6.00% 6.00% BMO 3.00% 3.00% Credit Suisse 2.00% 2.00% Deutsche 1.00% 1.00% No Reserve 0.00% % % No Special Selling Group Public sector syndicate roles are based on the results of dealer evaluations made by DMB (e.g. quarterly, using the domestic syndicate evaluation process) 28

29 Issuance Processes Examples of Standard Bond New Issue Processes: Standard Syndicated Typical for benchmark issues, to fully engage syndicate of dealers as underwriters and market-makers Reverse Inquiry (MTN) Typical for opportunistic financing of smaller sized deals that cater to the interest of a smaller investor base that require little secondary market-making Auctions Typical only for money-market and Sovereign bond origination 29

30 Bond Issuance Strategic Factors Affecting Issuance Decisions Internal Restrictions Blackouts surrounding budget & quarterly releases, public accounts, and documentation Investor relations when the team and Minister are on the road Client requirements/ limitations External Restrictions Market tone, investor sentiment, issuance congestion Scheduled market releases and holidays Portfolio Considerations Debt maturities profile, benchmark sizing, duration, and rates expectations Investor Relations Reverse inquiry, credit work Liquidity needs Forecast needs and potential for market disruptions 30

31 Liquidity Plan 1) Operating Line of Credit $Hundreds of million 2) Matched Book Program May be used to purchase assets from borrowed funds at a positive carry. Also, adds to the province s liquidity - e.g. recent Chinese Renminbi and Indian Rupee bonds 3) Warehouse Program May be used to pre-fund and hold debt in advance of financing requirements to maintain better liquidity positions and potentially to capture market opportunities 4) Sinking Funds Accounts used to steadily aggregate funds used in pay down a bond when it matures. 5) Restrictions on the province s net maturity profile Sum of debt maturities in any given year are capped at $5 billion by policy 6) Cash and Temporary Investments 31

32 SHORT TERM DEBT ISSUANCE $25, Provincial Short Term Programs ($ millions) March 1, 2018 $20, $15, $10, $5, $- B.C. BCMFA Alb Sask Man Ont Que N.B. N.S. P.E.I. NFld. DMB uses Promissory notes and Commercial Paper to access short-term funding for the Province and its clients 32

33 Short term Debt Issuance BC maintains an active issuance presence in the short term debt market Reasons and rationale Cost effective, flexible dating, liquid funding, client preference Size and shape Monitoring yields, relative spreads and clients needs Canadian and US dealer syndicates Domestic promissory notes Fixed maturity of 1 day to 365 days US unsecured commercial paper: Terms up to, but not exceeding 270 days Northbound swap brings US$ funds up to C$ equivalent rate (arbitrage funding against our domestic cost of funds) 33

34 Thank You 34

35 Appendix: Typical Swap Transaction Province of British Columbia 2.90% Cdn 2.10% US Swap Counterparty e.g. Royal Bank of Canada 2.10% US Overview of hedged foreign issuance: BC issues a US dollar bond, owing investors semi-annual coupons and principal repayment over the life of the bond (US$ cash flow stream) Global Bond holders (investors) BC engages a swap counterparty to replicate this US$ cash flow stream in exchange for a negotiated C$ cash flow stream BC now pays a C$ cash flow stream for the life of the bond and the investors receive their US$ cash flow stream Transaction completely eliminates foreign exchange risk as all US dollar payments are provided by the swap counterparty 35

Comments on Selected Financial Information. 4.3 Debt

Comments on Selected Financial Information. 4.3 Debt 4.3 Debt As at 31 March 2006, borrowings were reported in the Consolidated Statement of Financial Position at $6.5 billion, which represents total borrowings of $7.4 billion less sinking fund assets of