Ontario Plans to Sell More Green Bonds, Likes 30-Year Debt Terms

(Bloomberg) -- Ontario plans to sell more green bonds this year and will take advantage of lower yields to issue more 30-year debt, according to the head of the finance authority for the Canadian province.

The drop in yields over the last six months makes 30-year bonds more attractive, after the long-term notes accounted for a quarter of Ontario’s borrowing in public markets last fiscal year.

“We really like the 30-year term right now because that’s where rates have dropped the most,” Gadi Mayman, chief executive officer of the Ontario Financing Authority, said in an interview Tuesday at Bloomberg’s New York headquarters. “The curve is very flat. So if we can issue out that far” with low rates, “we will,” he said.

“We are going to try to extend term as much as we can,” he added.

Ontario, which has already sold C$4.6 billion ($3.4 billion) in bonds this fiscal year, needs to ensure that investors are willing to buy these long-term notes with yields so low, Mayman said. The yield on the government of Canada 30-year bond has dropped to about 2 percent, from almost 2.6 percent in October.

Investor Demand

“The offset is that with the flattening of the curve, investors may be less interested in going out there,” Mayman said. “So we need to make sure before we do a 30-year issue that investors are going to be there.”

On March 14, Ontario added C$750 million to its 2.9 percent 30-year bonds at a spread of 85 basis points over the Federal government securities with a similar duration, according to Bloomberg data. The notes are quoted at a spread of about 84 basis points to government bonds and around 6 basis points wider than the yield investors demand to hold comparable debt from Quebec, which is posting balanced budgets, according to bid prices on Bloomberg Tuesday.

Ontario Plans to Sell More Green Bonds, Likes 30-Year Debt Terms

The province has set a target to raise 70 percent to 80 percent of its borrowing plan in Canadian dollars, though that could change slightly depending on market conditions, he said.

“If we end up with international markets, particularly in U.S. dollars or euros, particularly strong we might be below 70 percent,” he said. “We won’t go much above 80 percent because it’s really important for us to continue to borrow internationally.”

Ontario also plans to ramp up its sales of green bonds, which are used to finance projects like renewable energy or public transit that can help reduce the emissions of green-house gases. Ontario sold one green bond in January, for the fiscal year that ended March 31.

“We may look at doing more than one this year,” Mayman said.

At the same time, the province will continue its fight to block the federal government’s imposition of a carbon tax, which went into effect April 1 after Premier Doug Ford scrapped a previous cap and trade program.

Danger Tax

“There is a clear and present danger with this carbon tax,” Finance Minister Vic Fedeli said in the same interview, adding that carbon taxes aren’t the only way to fight climate change. Ontario has joined Alberta, Manitoba and other provinces in a court challenge to the tax imposed by Prime Minister Justin Trudeau on provinces that don’t have their own tax plan.

Fedeli said he’s optimistic the province will get a debt upgrade from credit rating companies as Ontario moves ahead with its five-year plan to balance the books. The upgrade may take a year or two, Mayman said.

“They understand where we are going,” Fedeli said. “They know we have a path to balance.”

Even as the region is reigning in spending, its net debt will rise by more than C$16 billion to C$359.9 billion at the end of the current fiscal year, and the region’s net debt to GDP is expected to end this year at a record high 40.7 percent.

Borrowing Plan

Ontario, the world’s largest issuer of sub-sovereign debt, aims to borrow C$36 billion of long-term debt and increase its outstanding short-term securities by C$1.2 billion during the current fiscal year, the government said in its recent budget. That compares with C$39.6 billion of long-term debt raised in the previous period.

On April 11, the government unveiled a budget plan that will eliminate the annual deficit by fiscal 2023-24, after a projected shortfall of C$11.7 billion in the fiscal year that ended on March 31. For this fiscal year, the province’s 11th straight deficit is estimated at C$10.3 billion, including a buffer of C$1 billion.

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