DBRS Confirms the City of Montréal at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the City of Montréal (the City or Montréal) at A (high) with Stable trends. The ratings are supported by Montréal’s large and well-diversified economic base, prudent fiscal management framework, improved pension outlook and sizable base of liquidity. The ratings are constrained primarily by an elevated and rising debt burden associated with the major infrastructure renewal and investment plans of the City and the consolidated transit agency, Société de transport de Montréal (STM).

The City continues to record reasonably solid operating results, posting an operating surplus of $520 million in 2015, down from $885 million the prior year, as expenses increased by 9.5% largely because of higher transportation and transit spending. Revenue growth was more muted at 2.2%. After recognizing net capital expenditures (capex) as incurred, the City generated a DBRS-adjusted post-capex deficit of nearly $322 million, which is down from a restated surplus of $150 million the prior year. Net capex increased to $841 million from $735 million.

The City projects (as of August 2016) that it will achieve another modest surplus of $63 million in 2016 for the Municipal and Agglomeration Councils (excluding consolidated entities), although DBRS anticipates that increased net capex is likely to produce a DBRS-adjusted post-capex deficit for the year. The 2017 budget includes moderate revenue and spending growth of 2.8%, mostly driven by the strategy to significantly increase cash funding from operations to support accelerated capital investments, and is supported by an average tax rate increase of 1.7%, which is below the rate of inflation and lower than the previous three years. The City continues to realize significant savings from provincial pension reform legislation and from the ongoing Five-Year Workforce Plan. DBRS is encouraged by the City’s continued adherence to a generally prudent fiscal framework that has produced operating surpluses and materially reduced the share of expenditure on compensation; however, reaching affordable agreements with major employee groups will be important to ensure a sustainable fiscal trajectory.

Montréal’s Three-Year Capital Program entails $6.4 billion in planned investment; this is an ambitious and materially higher level of spending than what was contained in the previous plan (+22%). Combined with sizable capital investment plans at STM, DBRS expects Montréal’s debt burden to rise steadily over the forecast horizon. Based on current investment and financing plans, DBRS-adjusted net tax-supported debt is projected to reach $6.1 billion in 2019, or roughly 2.4% of taxable assessment. On a per-capita basis, tax-supported debt is expected to reach just under $3,000 in 2019, which DBRS considers to be manageable for the ratings.

RATING DRIVERS
Upward pressure on the ratings is not expected but could materialize with a sustained improvement in balance sheet flexibility through lower debt and higher liquidity, and adherence to a disciplined fiscal framework. A significant deterioration in fiscal results and a debt burden that evolves materially above current projections could lead to downward pressure on the ratings.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The principal methodology is Rating Canadian Municipal Governments, which can be found on dbrs.com under Methodologies.

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