The Good: In 2004, Alberta was a debt-free province, but in the ensuing years, governments saw an opportunity to get elected by promising to spend more and tax less…and deficits became the norm. But with the development of the oil sands, an influx of new workers increased the population, raising the demand for new services. So, the province engaged in a massive capital expenditure program to build new infrastructure in order to promote development of new communities. As oil prices rose, the province took advantage by using some of the revenues to pay down their debt. This sound fiscal management saw Alberta bonds trade at the lowest yield among any province in the country. This is a superb example of going into debt for the right reasons and the market rewarded the province: despite rising provincial debt levels, spreads stayed level, even through the financial crisis of 2008, when oil prices fell from a high of $147 to a low of $33.
The Bad: Because of the investment into the oil patch in the late 00s, Alberta became heavily-dependent on the tar sands, and the 2015 oil price shock hit the province hard. Energy revenues decreased and the Alberta government was forced to continuously issue more debt to balance its budget. Borrowing costs went up, spreads above equivalent Ontario bonds increased, and the province’s rating was cut from AAA to AA.
The Opportunity: Alberta’s dependence on the oil sands means that investors can now get exposure to the energy sector and oil prices without necessarily buying riskier corporate bonds issued by energy producers. In short, Alberta bonds currently offer an attractive spread over equivalent Ontario bonds, as they both have the same AA credit rating and we don’t foresee any major budget deterioration as long as WTI crude hovers around $55. All the better if we witness an oil bull market.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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