DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of New Brunswick (New Brunswick or the Province) at A (high) and its Short-Term Debt rating at R-1 (middle). Concurrently, DBRS Morningstar confirmed the Guaranteed Long-Term Liabilities and Guaranteed Short-Term Liabilities ratings of New Brunswick Municipal Finance Corp. at A (high) and R-1 (middle), respective¬ly. All trends are Stable, reflecting DBRS Morningstar's view that while financial risk metrics are expected to deteriorate in the near term because of the Coronavirus Disease (COVID-19), the impact is expected to be temporary and the government remains committed to fiscal sustainability and reducing debt in subsequent years.
New Brunswick released its 2020 budget on March 10, 2020, before widespread physical distancing measures were introduced to combat the coronavirus. In a coordinated effort from all four parties of the Legislative Assembly of New Brunswick, the 2020 budget was passed on March 13, 2020. Since that time, New Brunswick's fiscal and economic outlook have deteriorated markedly, though the full extent of the deterioration is still uncertain. Private-sector economic forecasts have been revised down steadily in recent weeks. The first-quarter fiscal and economic update is not anticipated until August 2020, though the Province may choose to provide an earlier update.
Despite the anticipated deterioration in the outlook, the Province's credit profile remains consistent with the A (high) ratings. This reflects New Brunswick's progress in recent years to restore fiscal balance and reduce debt, leaving the Province in a much better position entering the pandemic. While considerable downside risk remains, New Brunswick's economy is expected to be less affected than Canada as a whole, reflective of a greater reliance on the public sector, and at the time of writing, the coronavirus pandemic appears to have been less severe in New Brunswick relative to other provinces.
DBRS Morningstar has assumed a meaningful contraction in economic activity (5.5% real, 4.0% nominal) in 2020, consistent with recent private-sector forecasts, reflecting a shutdown of nonessential services that has lasted for several weeks and an extended period of normalization characterized by a slow return to work and ongoing physical distancing requirements. New Brunswick began a gradual phased reopening on April 24, 2020, allowing some businesses to start up again provided they adhered to strict protocols.
With a material decline in revenue and modest new measures to support individuals and businesses, DBRS Morningstar estimates the Province's deficit to be about $525 million. This equates to a DBRS Morningstar-adjusted deficit of $460 million, or 1.3% of GDP. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized to arrive at the adjusted deficit. As investment in tangible capital assets will likely remain below amortization, this results in a positive adjustment to New Brunswick's projected deficit.
With the deterioration in the operating outlook and additional cash requirements to fund deferral programs and business supports, DBRS Morningstar estimates that the Province's borrowing program could increase by $840 million to nearly $2.1 billion in 2020–21. Similarly, DBRS Morningstar estimates that net debt could surpass $14.5 billion and that the Province's DBRS Morningstar-adjusted debt will approach $16.2 billion. This equates to a debt-to-GDP ratio of about 44.5%, an increase of more than three percentage points from 2019–20 and exceeding the recent peak of 44.1% in 2016–17.
A negative rating action could result from a sustained deterioration in operating results and marked increase in the debt-to-GDP ratio beyond the levels outlined above and/or NB Power failing to reduce leverage, causing DBRS Morningstar to no longer treat NB Power as self-supported. Even prior to the coronavirus, a positive rating action was considered unlikely, as the ratings were constrained by New Brunswick's weak economic fundamentals.
DBRS Morningstar expects to conduct a subsequent review of the Province's credit profile once the outlook has stabilized and New Brunswick has provided a comprehensive fiscal and economic outlook. At that time, DBRS Morningstar expects to release its customary rating report.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 15, 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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