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ATB Financial -- Moody's places Alberta's long-term ratings under review for downgrade

Rating Action: Moody's places Alberta's long-term ratings under review for downgrade

Global Credit Research - 31 Aug 2020

Toronto, August 31, 2020 -- Moody's Investors Service, ("Moody's") has today placed the Aa2 and (P)Aa2 long-term debt ratings of the Province of Alberta (Alberta) and Alberta's aa3 Baseline Credit Assessment (BCA) under review for downgrade. Concurrently, Moody's placed under review for downgrade the Aa2 long-term debt ratings of the Alberta Capital Finance Authority (ACFA) and the Aa2 long-term issuer rating of ATB Financial (ATB), reflecting their status as agents of the Crown and the provincial guarantee of all their liabilities. At the same time, Moody's affirmed Alberta's P-1 short-term issuer and commercial paper ratings and ATB's P-1 short-term issuer rating.

The review for downgrade follows the province's August 27 fiscal update for 2019-20 and 2020-21 that reflects a significantly faster debt accumulation and larger deficits than previously projected under Moody's stress scenarios. The review period will allow Moody's to assess the impact of the revised fiscal plan of the province, including its susceptibility to the continued uncertainty stemming from the ongoing coronavirus pandemic, as well as the impact on its debt and liquidity profiles.

Affirmations:

..Issuer: Alberta, Province of

.... ST Issuer Rating, Affirmed P-1

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: ATB Financial

.... ST Issuer Rating, Affirmed P-1

On Review for Downgrade:

..Issuer: Alberta Capital Finance Authority

....Backed Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Aa2

..Issuer: Alberta, Province of

....Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)Aa2

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Aa2

....Senior Unsecured Shelf, Placed on Review for Downgrade, currently (P)Aa2

..Issuer: ATB Financial

.... LT Issuer Rating, Placed on Review for Downgrade, currently Aa2

Outlook Actions:

..Issuer: Alberta Capital Finance Authority

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Alberta, Province of

....Outlook, Changed To Rating Under Review From Stable

..Issuer: ATB Financial

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE

RATIONALE FOR PLACING THE RATING UNDER REVIEW FOR DOWNGRADE

Today's action reflects the material shift in planning presented by Alberta, which includes the continued negative impacts of weak oil prices on revenues and the fiscal impacts of the coronavirus pandemic on the province which Moody's views as a social risk. Alberta's fiscal update indicates a CAD24.2 billion deficit (62.8% of revenue) for 2020-21 and represents a material shift in the government's fiscal plan, on both its revenue and expenses forecast for the year. The revised deficit is nearly 2.5 times larger than the province's largest previous deficit since the global financial crisis, and is significantly larger than Moody's previous forecasts. While the province did not present a forecast beyond the current fiscal year, Moody's review will take into account the greater fiscal challenges identified by the province and how these challenges will impact Alberta's credit quality over the next 5 years should the fiscal update materialize.

The weaker metrics also incorporate the province's decisions to accelerate its capital spending by around 20%, or CAD1.4 billion relative to budget, primarily reflecting economic stimulus spending. The accelerated capital plan, continued outsized deficits, and the province's decision to raise its borrowing by CAD6.5 billion in 2020-21 for liquidity purposes will cause the province's debt burden (as measured by net direct and indirect debt relative to revenues) to increase materially to approximately 280% in 2020-21 (above Moody's previous base case forecast of around 245%) and to potentially exceed 300% by 2021-22.

The ratings of ACFA and ATB reflect their status as agents of Alberta, and as a result their credit quality is captured through their relationship with the province rather than through standalone credit considerations.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

In Moody's assessment, Alberta's exposure to environmental risks is high given the high level of carbon intensity and greenhouse gas emissions within its economy. As such the economy is susceptible to the increasing efforts to curb carbon emissions globally. The province is also susceptible to natural disasters including wildfires and floods which could lead to significant mitigation costs.

Exposure to social risks is moderate. Moody's regards the coronavirus pandemic as a social risk, given its substantial implications for public health and safety and its negative implication on the province's fiscal profile. Alberta has historically also has high per capita healthcare spending, although these pressures are partly mitigated by the province's relatively young population.

Governance considerations are material to Alberta's credit profile, but overall governance risk is low given transparent budgets and economic forecasts, and transparent financial statements, and, despite a risk in the debt burden, prudence in its debt management policies including fully hedging all foreign currency risk.

WHAT COULD CHANGE THE RATING UP/DOWN

FACTORS THAT COULD LEAD TO A CONFIRMATION OF THE RATINGS AT THE CURRENT LEVEL

Moody's would consider confirming the ratings if the review concluded that Alberta maintains sufficient fiscal flexibility to record fiscal outcomes that mitigate some of the heightened pressure and continue to record consolidated deficits and debt burdens in line with similarly rated global peers.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if Moody's were to conclude that the revised larger deficit and debt figures are unlikely to be reduced materially in a short-time period, resulting in a lengthy period of sustained weakening of the province's credit profile.

The principal methodology used in rating Alberta, Province of was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. The principal methodology used in rating Alberta Capital Finance Authority and ATB Financial was Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Adam Hardi, CFA Vice President - Senior Analyst Sub-Sovereign Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Yves Lemay MD-Sovereign/Sub Sovereign Sub-Sovereign Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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