TEXT - S&P affirms Montreal, Canada's ratings
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 strong operating and after-capital results in 2011, good economic performance, and adequate liquidity. -- The stable outlook reflects our expectations that Montreal will continue to produce strong operating and after-capital results, the economy will increase moderately in 2012 and 2013, liquidity will remain adequate, and the recent turbulence in political leadership will steadily subside with the appointment of an interim mayor. Rating Action On Nov. 13, 2012, 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 (A+/Stable/A-1+). The outlook is stable. Rationale The ratings on Montreal reflect what we consider to be the following positive factors: -- What we believe to be strong operating and after-capital results continued in 2011. The operating surplus improved to 15% of operating revenues, up from 14% a year earlier. The improvement came as increases in key revenue sources (property taxes, fees, and subsidies) surpassed those of key expenditures, such as firefighting and policing and transportation. The after-capital surplus also strengthened in 2011 to 4% of total revenues from 3% in 2010 and was the best result the city has turned in since the recession despite the fourth-highest capital program on record. For 2012 and 2013, we expect operating surpluses of 10%-15% of projected operating revenues, with after-capital results that are close to balance. -- Montreal's deep and diversified economy produced good results in 2011, in our view. GDP (at basic prices) increased about 5% in the year, according to provincial estimates. Despite the output growth, the labor force did not respond as favorably. The Montreal unemployment rate was unchanged in 2011, at 9.7%. Employment, on the other hand, declined almost 4%. Labor force results were somewhat better in the Montreal census metropolitan area (CMA). The unemployment rate fell slightly to 8.3% in 2011 from 8.6% (the provincial unemployment rate was 7.8%). CMA employment was unchanged. Construction activity indicators rose strongly in 2011. The value of building permits rose 46% in 2011 and housing starts were up 29%. The tax assessment base rose 1% in 2011. The province projects moderate levels of job creation and real GDP growth of 1%-2% in 2012 and 2013, but with little improvement in the unemployment rate. We expect that the Montreal area should match or outperform the province, being Quebec's chief urban center and economic engine. We believe the extent and sustainability of the U.S. recovery and the potential for European debt risks to spill over onto the global economy are the chief risks to the city and province's economic outlook. -- We believe liquidity levels are adequate. Montreal had cash and temporary investments of slightly more than C$1.2 billion at year-end 2011, which was up from C$1.0 billion at the end of 2010. As well, the city held sinking funds totaling C$1.5 billion at that time. By our calculation, those cash and investment holdings translated into estimated free cash and liquid assets of slightly less than C$1.1 billion. The ratio of free cash and liquid assets plus committed facilities to prospective debt service cost was close to 90%. As one of the largest municipal issuers in the country, Montreal also has strong access to Canada's well-developed capital markets, in our view. The city also has bank lines of credit totaling C$313 million, of which C$6 million had been used at the end of 2011. We believe the following factors partially offset these credit strengths: -- Montreal's debt burden is still high compared with those of peers (especially Canadian), although it fell in 2011 for the second consecutive year. At the end of 2011, tax-supported debt, which was unchanged from the previous year at C$7.4 billion, represented 136% of operating revenues. Montreal planned to issue about C$1.0 billion in 2012. We estimated the tax-supported debt burden could rise to as high as 142% of projected operating revenues, with tax-supported debt reaching C$7.9 billion by the end of the year, and then stabilizing in 2013. We believe, however, that the city will actually issue about C$500 million only in 2012 and that actual issuance will be lower than planned as well in 2013. -- The mayor, who was in his third-term in office, resigned recently in the wake of a corruption scandal. The scandal involves the alleged price-fixing of construction contracts, including municipal contracts. The province has formed a commission, which is investigating the allegations. We believe that the mayor's resignation, appointment of an interim mayor, the possibility of continued revelations from the commission, and the upcoming municipal elections in November 2013 could distract council somewhat from the process of governing, including passing the 2013 budget (among other priorities). Outlook The stable outlook reflects Standard & Poor's expectation that Montreal will continue to produce strong operating surpluses (greater than 10% of operating revenues) and near-balanced after-capital results in the next two years. We expect the recent turbulence in political leadership will steadily subside with the appointment of an interim mayor. The city's economy should continue increasing in 2012 and 2013 with moderate GDP growth and job creation, but with little improvement in the unemployment rate. We further expect that Montreal will maintain adequate liquidity levels with cash and investment holdings close to C$1.0 billion and that the tax-supported debt burden will stabilize in 2013. A significant decline in liquidity, the spread of turbulence in political leadership to the administration, operating surpluses that remain below 10% of operating revenues, and the return of consecutive after-capital deficits in the next two years could place downward pressure on the ratings. Although we don't expect it, a sustained, material decline in the debt burden coupled with strengthening cash and investment holdings and continued solid financial results would be preconditions for an upgrade. Related Criteria And Research Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 Ratings List Ratings Affirmed Montreal (City of) Issuer credit rating A+/Stable/-- Senior unsecured debt A+
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