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. Although physical distancing requirements and other public health measures to fight the Coronavirus Disease (COVID-19) pandemic negatively affected the City's finances, these impacts have been largely mitigated by senior government funding and prudent fiscal measures adopted by the City. Furthermore, there is reasonable headroom within the current rating category to withstand a temporary fiscal deterioration and planned increases in debt arising from the City’s large capital plans and its consolidated transit agency, Société de transport de Montréal (rated A (high) with a Stable trend by DBRS Morningstar).

Although the pandemic has had significant impacts on Montréal's economy, prudent fiscal management and government transfers supported the City's 2020 operating results. The City reported an operating surplus of $1.3 billion in 2020 (2019: $884.6 million). DBRS Morningstar estimates the post-capex deficit to be $398.0 million and incorporates our estimate for a large capex program. In its 2021 budget, Montréal reiterated a commitment to maintaining a balanced budget, infrastructure development, economic recovery measures, tax relief for households and businesses, and ongoing cost containment. The 2021 budgeted spending is largely unchanged ($6.2 billion) and includes approximately $60.0 million toward the City’s 2021 economic recovery plan. In late 2020, the City presented its inaugural long-term strategic vision (Montréal 2030), which identified the City's major priorities (including economic, social, and ecological resilience, innovation, and sustainable development), key challenges, and action plans over the next decade.

The City's investment in capital remains considerable and will drive the increase in tax-supported debt burden. DBRS Morningstar forecasts a moderate increase in debt to nearly $3,700 per capita, or 2.5% as a share of taxable assessment, by 2023. The City signalled that actual capital plan realization will likely be somewhat lower than projected. Montréal is placed comfortably within the current rating category and can withstand this deterioration in fiscal risk assessment factors.

RATING DRIVERS
Although unlikely, DBRS Morningstar could lower the ratings if the operating result deteriorates materially on a sustained basis and if debt increases to well above current projections. A positive rating action is possible if the pace of tax-supported debt growth moderates on a sustained basis, coupled with a steady improvement in DBRS Morningstar-adjusted post-capex operating results.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Municipal Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377882), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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