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

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. Senior government funding and prudent fiscal measures adopted by the City have largely mitigated negative impacts from the Coronavirus Disease (COVID-19) pandemic on the City's finances. However, DBRS Morningstar notes that recent fiscal deterioration, slower population growth, and planned increases in debt arising from the City's large capital plans and its consolidated transit agency, Société de transport de Montréal (STM), constrain the ratings. DBRS Morningstar also confirmed STM’s Long-Term Debt rating and Commercial Paper rating at A (high) and R-1 (low), respectively, with Stable trends.

For the year ended December 31, 2021, the DBRS Morningstar-adjusted post-capital expenditure (capex) deficit was $435.8 million, higher compared with a deficit of $398.0 million in the year prior. The City received capital grants from the Province of Québec (rated AA (low) with a Stable trend by DBRS Morningstar) and the federal government to support its economic recovery in 2021, mainly under the gas tax program and toward public transit infrastructure. The City’s 2022 operating budget is balanced and projects spending of $6.5 billion, up 4.7% from the previous year’s budget. This spending includes one-time funding used to cover the Urban Agglomeration of Montréal's accumulated deficit totalling $195.6 million. Other key spending priorities include moderately higher expenditures on public security, debt service, borough budgets, and economic development. In line with the Montréal 2030 strategic plan, key policy priorities will focus on public security, affordable housing, economic recovery and development, and ecological transition over the medium to longer term.

The City's investment in capital remains considerable and will drive a moderate increase in tax-supported debt burden. 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 from the planned increase in debt.

RATING DRIVERS
A positive rating action is possible if the pace of growth in tax-supported debt per capita moderates on a sustained basis, coupled with a steady improvement in DBRS Morningstar-adjusted post-capex operating results. 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Canadian Municipal Governments (April 14, 2022; https://www.dbrsmorningstar.com/research/395253), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

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

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