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. 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, 2022, the DBRS Morningstar-adjusted post-capital expenditure (capex) deficit was $102.4 million, an improvement compared with the deficit of $435.8 million in the year prior, largely reflecting net capex that more than offset the City’s operating surplus.

The City’s 2023 operating budget is balanced and projects spending of $6.8 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 $66.6 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. However, according to most recent projections, Montréal’s tax-supported debt burden is expected to rise at a slower pace over the medium term, compared with the previous budget forecast, given changes in provincial government subsidies related to transit projects and as the City increases its cash payments. 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.

CREDIT 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 (July 4, 2023; https://www.dbrsmorningstar.com/research/416784).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Canadian Municipal Governments (April 28, 2023) https://www.dbrsmorningstar.com/research/413266

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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