City of Montreal #A+# Ratings Affirmed On Continued Strong Outlook Stable

Stocks and Financial Services Press Releases Thursday December 19, 2013 10:16
RATING ACTION--19 Dec--Standard & Poor's

OVERVIEW We are affirming our 'A+' long-term issuer credit and senior unsecured debt ratings on the City of Montreal.The affirmation reflects our favorable view of the city's deep and diversified economy, solid operating surplus and small after-capital surplus in 2012, and moderate contingent liabilities. The stable outlook reflects our expectations that Montreal will see moderate economic growth in 2014 with increasing GDP per capita and job growth in the next two years, operating surpluses will remain well above 5% of projected operating revenues, after-capital results will be close to balance, and free cash and liquid assets will continue to exceed 40% of prospective debt service costs for 2013 and 2014.

RATING ACTION On Dec. 18, 2013, Standard & Poor's Ratings Services affirmed its 'A+' long-term issuer credit and senior unsecured debt ratings on the City of Montreal, in the Province of Quebec. The outlook is stable.


The ratings reflect what we view as Montreal's deep and diversified economy, solid operating surplus and small after-capital surplus in 2012, and moderate contingent liabilities, which we view as positive for the ratings. The ratings also reflect our positive opinion of the "predictable and well-balanced" institutional framework for Canadian municipalities. Montreal's economy slowed down somewhat in 2012. Growth in GDP at basic prices in 2012 was what we view as respectable at about 3% and GDP per capita was estimated to be about C$58,100 for the year. Construction activity and labor force indicators, however, weakened generally. The Montreal unemployment rate rose to 10.3% in 2012 from 9.7% in 2011. Employment, on the other hand, increased a mere 0.2% in 2012. The census metropolitan area (CMA) did not fare much better. Employment growth in 2012 was faster at 1.3%, but the unemployment rate rose to 8.5% from 8.3% in 2011. The value of building permits fell 4% in 2012 following two strong years in 2010 and 2011. Housing starts fell by 13%, also after two strong years. We are expecting relatively modest economic growth in 2013 and 2014 for the greater Montreal economy in line with the economic projections for the province. The province projects real GDP growth of 0.9% and 1.8% in 2013 and 2014, respectively. The unemployment rate should edge down in both years as employment rises about 1% annually. The city recorded a solid financial performance in 2012, though slightly weaker than the strong results of 2011. The 2012 operating surplus came in at 13% of operating revenues, down slightly from the 15% surplus of 2011. The 2012 after-capital surplus was 1%, which was also down from the standout surpluses of 2010 and 2011. The results are noteworthy as well because the 2012 capital program was Montreal's third-highest on record. For 2013 and 2014, we expect operating surpluses to range from 11%-13% of projected operating revenues. Based on our conservative base-case forecast, we expect operating balances to remain above 5% of operating revenues and after-capital results could slip into small deficits, for the 2011-2015 average, if the city fully executes its capital plans. We believe Canadian municipalities benefit from a "predictable and well-balanced" local and regional government framework that has demonstrated a high degree of institutional stability. Although provincial governments mandate a significant proportion of municipal spending, they also impose fiscal restraint through legislative requirements to pass balanced operating budgets. Municipalities generally have the ability to match expenditures well with revenues, except for capital spending, which can be intensive. Any operating surpluses typically fund capital expenditures and future liabilities (such as postemployment obligations and landfill closure costs) through reserve contributions. Montreal's contingent liabilities are moderate, in our view. The 2012 financial statements indicate that the city has an unfunded obligation for other postretirement benefits of about C$250 million. Montreal, like all Canadian municipalities, has made commitments for goods and services it will receive. Those commitments, both operating and capital, totaled C$3.8 billion at the end of 2012. As well, the city has issued a significant amount of debt that Quebec government debt service grants supports. At the end of 2012, provincially supported debt stood at close to C$2 billion. In the very unlikely event that Quebec were to reduce or curtail its debt service grants to Montreal, the additional debt service costs that the city would have to fund would be a material budgetary pressure, in our view. In our opinion, Montreal's budgetary flexibility, financial management, debt burden, and liquidity are neutral to the ratings. The city's budgetary flexibility is what view as good, like that of most Canadian municipalities. In fiscal 2012, modifiable (own-source) revenues represented 87% of operating revenues and capital spending accounted for 18% of total expenditures. In our opinion, Montreal's budgetary flexibility is constrained on both the spending and revenue side. Citizens have had a high resistance, historically, to spending or service cuts and the city has reduced leeway on future infrastructure spending. As well, all taxpayers in Canada are averse to tax increases and the citizens of Montreal are no exception.

We believe that the city's financial management is neutral to its credit profile. Montreal budgets only for the current budget year and does not provides any medium-term outlook beyond. Budget information, however, is very detailed and comprehensive. The city produces annually a rolling three-year infrastructure plan. The level of transparency and disclosure in financial statements is what we view as high. Financial statements are independently audited with no qualifications. The city has substantial number of financial policies covering debt, reserves, amongst others. A capable and experienced administration, which regularly monitors key external risks and updates senior management, implements council's decisions. Montreal has recently elected a new mayor. The former mayor resigned in the wake of a corruption scandal and his replacement also resigned after being charged. We expect that the arrival of the new mayor will usher in a period of stability after the turbulence of the past two years. Tax-supported debt, including the debt of public transit provider Societe de Transport de Montreal (STM), capital leases, and guarantees, fell slightly to C$7.3 billion in 2012 from C$7.4 billion at the end of 2011. The decline, the first in more than a decade, was the result of the large increase in sinking funds in 2012. With the increase, the tax-supported debt burden fell in 2012 to 127% of operating revenues from 136% in 2011. A 6% increase in operating revenues as well as the fall in tax-supported debt also boosted the decline. Equally noteworthy, Montreal's interest burden fell to 8% of operating revenues, down from 9% or more in recent years. The decline in both burdens improved our overall view of the city's debt burden. The improvement in Montreal's tax-supported debt notwithstanding, its debt burden still remains somewhat high compared with that of similarly rated peers. For 2013 and 2014, new issuance will exceed amortization and we expect tax-supported debt will increase to C$7.7 billion in 2013 and C$7.8 billion in 2014. Tax-supported debt and interest burdens will rise modestly to 129% and to slightly less than 9% of projected operating revenues, respectively, in 2013 and 2014, thanks to robust operating revenue growth.


Montreal's liquidity levels at year-end 2012 were neutral to the ratings, according to our criteria. The city had cash and temporary investments of slightly more than C$1.1 billion, which was down from C$1.2 billion at the end of 2011. In addition, Montreal held sinking funds totaling C$1.9 billion at that time, up substantially from C$1.5 billion the year previous. The city also has unused committed bank lines of credit totaling about C$300 million. By our calculation, those cash and investment holdings translated into estimated free cash and liquid assets of close to C$870 million, which is down from a year earlier. Free cash and liquid assets plus committed facilities-to-prospective debt service cost was about 84% (compared with 90% in 2011). As one of the largest municipal issuers in the country, Montreal also has what we view as strong access to Canada's well-developed capital markets, which it maintained throughout the recession. Nevertheless, the city has high funding needs owing to its substantial planned capital spending on its infrastructure deficiency and for STM.


The stable outlook reflects Standard & Poor's expectation that Montreal will see moderate economic growth in 2014, with increasing GDP per capita and job growth in the next two years. We expect that operating surpluses will remain well above 5% of projected operating revenues and after-capital results will be close to balance. We also expect that free cash and liquid assets will continue to exceed 40% of prospective debt service costs for 2013 and 2014. Furthermore, increases in debt and debt burden will not be greater than contemplated in the current three-year capital plan (2014-2016). A material increase in debt burdens beyond that incorporated into the current capital plan, a significant decline in liquidity, and large after-capital deficits could place downward pressure on the ratings. A sustained material decline in the debt burden coupled with strengthening cash and investment holdings and sustainable after-capital surpluses could lead to an upgrade.

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