TEXT-S&P raises City of Sault Ste. Marie rating to 'A+'

Mon Nov 5, 2012 5:46pm EST
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

Overview
     -- We are raising our long-term issuer credit rating on the City of Sault 
Ste. Marie to 'A+' from 'A'.
     -- We are also assigning our 'A+' senior unsecured debt rating to the 
city.
     -- The upgrade reflects our view of Sault Ste. Marie's strong liquidity 
position and modest capital needs, which we believe will keep its debt burden 
very low relative to that of similarly rated international and domestic peers.
     -- The stable outlook reflects Standard & Poor's expectations that within 
the two-year outlook horizon, Sault Ste. Marie's tax-supported debt will not 
materially surpass 15% of its operating revenue, its liquidity position will 
remain strong, and budgetary performance will not erode such that operating 
balances fall below 5% of operating revenues or after-capital deficits exceed 
10% of total revenues.

Rating Action
On Nov. 5, 2012, Standard & Poor's Ratings Services raised its long-term 
issuer credit rating on the City of Sault Ste. Marie, in the Province of 
Ontario (AA-/Negative/A-1+), to 'A+' from 'A'. The outlook is stable. At the 
same time, Standard & Poor's assigned its 'A+' senior unsecured debt rating to 
the city.

The upgrade reflects our view of Sault Ste. Marie's strong liquidity position 
and modest capital needs, which we believe will keep its debt burden very low 
relative to that of similarly rated international and domestic peers. 

Rationale
The rating on Sault Ste. Marie reflects Standard & Poor's view of the city's 
very low debt burden, which is lower than many of its similarly rated 
international and domestic peers, and its strong liquidity position. We 
believe that the weakening of budgetary performance in the past three years 
and Sault Ste. Marie's slow population growth and low levels of household 
income, which constrain its economic prospects, mitigate these strengths 
somewhat.

In our view, the city's credit profile continues to be supported by its very 
low debt burden. Total tax-supported debt at the end of 2011 was C$19.7 
million, equal to 11.0% of operating revenue (all figures Standard & 
Poor's-adjusted). This is down from 17.7% in 2005 and we do not believe that 
it will materially exceed 15% during the next two years as Sault Ste. Marie's 
capital plan requires only modest debt-financing.

The city has maintained what we view as a strong liquidity position, similar 
to most Canadian municipalities, and has been a net creditor since 2006. Free 
cash and liquid assets of about C$43 million at year-end 2011 were sufficient 
to cover more than 11x the estimated debt service for 2012. We believe that 
Sault Ste. Marie will maintain its solid liquidity and net creditor positions 
during our two-year outlook horizon.

The city's budgetary performance has weakened in the past three years as 
declining provincial grants have pressured operating budgets and resulted in 
operating surpluses declining to about 10% of operating revenues in 2009-2011 
from more than 15% in previous years. This has also pushed after-capital 
balances into slight deficits in two of the past three years. We expect that 
this trend will continue during the next several years but that operating 
balances will remain above 5% of operating revenues and after-capital deficits 
could reach 5% of total revenues.

In our opinion, Sault Ste. Marie's slow population growth and low household 
income levels constrain its economic growth prospects. The city's economy has 
been slowly diversifying away from mature steel and resource sectors but its 
unemployment rate remains above the provincial rate and was 8.9% in 2011, down 
from 10% in 2010. 

Outlook 
The stable outlook reflects Standard & Poor's expectations that within the 
two-year outlook horizon, Sault Ste. Marie's tax-supported debt will not 
materially surpass 15% of its operating revenue, its liquidity position will 
remain strong, and budgetary performance will not erode such that operating 
balances fall below 5% of operating revenues or after-capital deficits exceed 
10% of total revenues. We could revise the outlook to positive or raise the 
rating if there were a material improvement in budgetary performance, in 
particular a return to steady after-capital surpluses, and the economy showed 
measurable signs of robust growth. We could revise the outlook to negative or 
lower the rating if Sault Ste. Marie were to issue considerably more debt than 
expected, liquidity were to erode meaningfully, or there was a significant 
decline in budgetary performance.

Related Criteria And Research
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010

Ratings List
Sault Ste. Marie (City of)

New Rating
 Senior unsecured debt           A+

Rating Raised
                                 To                From
 Issuer credit rating            A+/Stable/--      A/Positive/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.