DBRS Limited (DBRS Morningstar) took rating actions on the Provinces of Alberta, Newfoundland and Labrador, and Saskatchewan as well as their related entities as follows:
-- DBRS Morningstar downgraded the Province of Alberta’s Issuer Rating and Long-Term Debt rating to AA (low) from AA and its Short-Term Debt rating to R-1 (middle) from R-1 (high). In addition, DBRS Morningstar changed the trend on the Province of Alberta’s Short-Term Debt to Stable from Negative. DBRS Morningstar also downgraded the Alberta Capital Finance Authority’s Long-Term Obligations rating to AA (low). The trends on all Issuer Rating and Long-Term Debt ratings are Negative.
-- DBRS Morningstar placed the Province of Newfoundland and Labrador’s Issuer Rating and Long-Term Debt rating of A (low) Under Review with Negative Implications, but confirmed its Short-Term Debt rating at R-1 (low) with a Stable trend. DBRS Morningstar also placed Newfoundland and Labrador Hydro’s Guaranteed Long-Term Debt rating of A (low) Under Review with Negative Implications, but confirmed its Guaranteed Short-Term Debt rating a R-1 (low) with a Stable trend. In addition, DBRS Morningstar placed Newfoundland and Labrador Municipal Financing Corporation’s Guaranteed Long-Term Debt rating of A (low) Under Review with Negative Implications.
-- DBRS Morningstar placed the Province of Saskatchewan’s Issuer Rating and Long-Term Debt rating of AA as well as its Short-Term Debt rating of R-1 (high) Under Review with Negative Implications. DBRS Morningstar also placed Saskatchewan Power Corporation’s Long-Term Obligations rating of AA and its Short-Term Obligations rating of R-1 (high) Under Review with Negative Implications.
The rating actions stem from the deteriorating global economic conditions and the sharp decline in global oil prices caused by the outbreak of the Coronavirus Disease (COVID-19) and measures taken by Saudi Arabia and Russia to recapture market share. If sustained, DBRS Morningstar believes that these factors will have a material impact on the provincial economic activity and public finances of Canada’s main oil and gas (O&G)-producing provinces.
PROVINCE OF ALBERTA
DBRS Morningstar believes that Alberta’s credit profile is no longer consistent with a AA rating and that risks remain firmly tilted toward the downside; as a result, DBRS Morningstar has maintained the Negative trend on Alberta’s Issuer Rating and Long-Term debt rating. Current economic conditions and actions taken by Saudi Arabian and Russian governments suggest that oil prices will be under pressure for the foreseeable future, which will have a significant and adverse impact on Alberta’s economic activity and government revenue. This will likely drive debt ratios significantly higher in the near to medium term.
DBRS Morningstar has estimated possible impacts using Alberta’s 2020 Budget, released in late February 2020. DBRS Morningstar estimates that the 2020–21 deficit (on an adjusted basis) may exceed 4.0% of GDP and that the adjusted debt-to-GDP ratio may rise above 30% in 2020–21 alone. Notwithstanding these estimates, there is uncertainty with respect to the current situation and Alberta has yet to outline a full fiscal policy response.
DBRS Morningstar last confirmed Alberta’s ratings on December 18, 2019. At that time, Alberta was projecting a steady decline in operating deficits and slowing debt growth. Notwithstanding the improving outlook, DBRS Morningstar maintained the Negative trend at that time because (1) risks remained skewed to the downside and (2) the United Conservative Party government had not demonstrated its ability to meet its fiscal policy objectives.
Alberta maintains ample liquidity to withstand near-term market volatility with more than $4.0 billion in cash and $16.0 billion in less liquid investments within the Alberta Heritage Savings Trust Fund and other endowments. Alberta continues to fund in the promissory note market and U.S. commercial paper market, and its next term debt maturity is not until June 2020 ($3.4 billion).
PROVINCE OF NEWFOUNDLAND AND LABRADOR
As with Alberta, DBRS Morningstar expects the oil-price correction to significantly and adversely affect the O&G activity and government revenue, prompting a deterioration in budgetary results and further debt growth.
Newfoundland and Labrador has yet to introduce its 2020 Budget or provide a meaningful fiscal update since oil prices began to decline; consequently, DBRS Morningstar has estimated possible impacts using its 2019 fiscal updates, Budget 2019 sensitivities, and insights from previous oil-price corrections. DBRS Morningstar estimates that the deficit (on an adjusted basis) may exceed 7.0% of GDP and the adjusted debt-to-GDP ratio may rise above 70% in 2020–21.
Newfoundland and Labrador’s credit profile was previously well placed within the A (low) rating category. While its credit profile is weakening, the full extent of the deterioration is not clear at this time and, therefore, DBRS Morningstar has not yet determined whether a subsequent rating action is appropriate. As such, DBRS Morningstar placed Newfoundland and Labrador’s long-term ratings Under Review with Negative Implications and will endeavour to resolve the Under Review status within the next three months.
Newfoundland and Labrador maintains sufficient liquidity to withstand near-term market volatility with approximately $800 million in cash on hand and additional cash and credit facilities within broader public-sector entities. Newfoundland and Labrador continues to fund in the short-term market and does not have term debt maturities until June 1, 2020 (USD 150 million).
PROVINCE OF SASKATCHEWAN
Saskatchewan’s economy and government finances will be adversely affected by the downturn in oil prices, but the extent to which its credit profile will deteriorate is less clear than for Alberta and Newfoundland and Labrador. In contrast with the other two provinces, Saskatchewan’s budget was balanced before the economic shock, its O&G industry is relatively less important to its economy, and O&G royalties account for a smaller share of its revenue.
In light of the significant deterioration in global economic conditions and oil prices, Saskatchewan has deferred introducing its 2020 Budget. Saskatchewan tabled its 2020–21 Estimates on March 18, 2020, but they present spending and debt on a narrower basis and do not include a revenue forecast. Nevertheless, the Estimates suggest that Saskatchewan was largely on track to complete the 2019–20 year in a roughly balanced position and that debt levels were likely to be consistent with earlier forecasts for 2019–20.
In the absence of a fiscal update, DBRS Morningstar has estimated possible impacts using Saskatchewan’s 2019 fiscal updates, Budget 2019 sensitivities, and insights from previous oil-price corrections. DBRS Morningstar estimates that the deficit (on an adjusted basis) may exceed 1.5% of GDP and the debt-to-GDP ratio may rise toward 30% in 2020–21. Together with a weaker economic outlook, these factors warrant a AA (low) rating. Notwithstanding these estimates, Saskatchewan’s outlook is highly uncertain and it has yet to provide meaningful fiscal policy guidance. Consequently, DBRS Morningstar placed Saskatchewan’s ratings Under Review with Negative Implications and will endeavour to resolve the Under Review status within the next three months.
Saskatchewan maintains ample liquidity to withstand near-term market volatility with $1.3 billion in cash on hand, more than $1.0 billion within broader public-sector entities, and more than $2.4 billion in sinking-fund assets. Saskatchewan continues to fund in the promissory note market and has only $300 million in term debt maturities (net of sinking funds) prior to December 2020.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Canadian Provincial and Territorial Governments, Global Methodology for Government Related Entities, and DBRS Morningstar Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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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.
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