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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the City of Montréal (Montréal or the City) at A (high) with Stable trends. The ratings are supported by the City’s prudent fiscal framework, large and well-diversified economic structure, relatively predictable revenues, and tight spending control. However, adverse effects from physical distancing requirements and other government measures to fight the Coronavirus Disease (COVID-19) pandemic are clouding the City's fiscal outlook. That said, there is reasonable headroom within the current rating category to withstand a temporary fiscal deterioration and planned increases in debt arising from the large capital plans of the City and its consolidated transit agency, Société de transport de Montréal (rated A (high) with a Stable trend by DBRS Morningstar).

Montréal's fiscal performance has remained strong over the past several years, and the City reported an operating surplus of $884.6 million in 2019. However, after adjusting for a large capital expenditures (capex) program, this equates to a DBRS Morningstar-adjusted post-capex deficit of $807.8 million (or 10.0% of revenues).

Montréal presented its 2020 budget in November 2019 and reiterated a commitment to keeping tax increases at or below the rate of inflation, investing in infrastructure, boosting economic development, limiting the tax burden, and sustainably containing compensation costs. The budget projected spending of $6.2 billion in 2020, up 8.1% from the prior year’s budget. Following the onset of the coronavirus pandemic, the City has presented two scenarios outlining the potential impact on its budget, although DBRS Morningstar notes that the deterioration appears manageable at this time. The City estimates an optimistic scenario budget impact of approximately $250 million and a pessimistic scenario impact of roughly $500 million, including contributions to the transit authority, Autorité régionale de transport métropolitain.

The City's investment in capital remains considerable and will drive the increase in the tax-supported debt burden. DBRS Morningstar forecasts moderate increase in debt to nearly $3,900 per capita, or 2.7% as a share of taxable assessment by 2022. The City signalled that capital investment may be somewhat lower than projected, in light of the pandemic and economic recovery thereafter.

RATING DRIVERS
Montréal is placed comfortably within the current rating category and can withstand a moderately weaker fiscal environment. DBRS Morningstar could lower the ratings if operating results deteriorate materially beyond expectations and on a sustained basis, or if debt increases to well above projections, resulting in a much weaker balance sheet. A rating upgrade is highly unlikely at this time.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Municipal Governments (May 15, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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