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

DBRS Limited (DBRS) 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 the City’s large and well-diversified economic structure, prudent fiscal framework and debt and liquidity management practices. However, the capital investment plans of the City and its consolidated transit agency, Société de transport de Montréal (STM), will lead to steady increases in DBRS-adjusted tax-supported debt over the medium term, limiting ratings improvement. There is significant flexibility within the credit profile to withstand the projected deterioration in financial risk assessment metrics.

The City’s fiscal performance in 2018 was broadly consistent with recent years, with the City recording a solid operating surplus of $1.2 billion before capital activities. Strong revenue growth of 10.9% (excludes capital revenues) outpaced operating spending growth of 6.4% (ex-amortization), supporting the result, driven in large part by a change in regional transportation governance and funding. As a result of record-high capital spending, supported in part by increased capital transfers from senior governments, Montréal recorded a DBRS-adjusted net post-capex deficit of $538.9 million, or 6.6% of revenues.

The 2019 budget represents continuity in the City’s approach to prudent fiscal management and maintains the strategic orientations from the first budget of Mayor Valerie Plante. The budget projects a spending increase of 4.3% over the prior year, including non-recurring items, while core spending growth is more limited at 1.2%. Matching revenue growth of 4.3% is to be supported by an average residential tax rate increase of 1.7%, levied through special-purpose taxes on water, transit and roads as opposed to the general levy. The latest version of the City’s $6.5 billion Three-Year Capital Works Program (TCWP) is largely unchanged in scope and continues an elevated level of capital spending to address accumulated infrastructure deficits and growth pressures. Considering the investment plans of STM and the City, DBRS expects that capex will drive growth in the tax-supported debt burden to approximately $3,600 per capita, or 2.6% as a share of taxable assessment through 2021.

RATING DRIVERS:
The Stable trends on the ratings incorporate both the substantial flexibility within the current ratings and the outlook for rising debt. While not expected, the ratings could be adjusted upward if debt growth is materially lower than currently anticipated as a result of a materially reduced capital program. DBRS could lower the ratings if fiscal results deteriorated significantly on a sustained basis and the City’s balance sheet weakened as a result of debt growth well above projections.

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

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

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@dbrs.com.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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