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Quebec, City of -- Moody's Affirms Quebec City's Aa2 rating, maintains stable outlook

·15 min read

Rating Action: Moody's Affirms Quebec City's Aa2 rating, maintains stable outlookGlobal Credit Research - 01 Sep 2022Toronto, September 01, 2022 -- Moody's Investors Service ("Moody's") today affirmed the aa3 baseline credit assessment (BCA) and Aa2 long-term senior unsecured debt ratings of City of Quebec (Quebec City). The outlook on the debt ratings was also maintained at stable.Affirmations:..Issuer: Quebec, City of....Senior Unsecured Regular Bond/Debenture, Affirmed Aa2.... Baseline Credit Assessment, Affirmed aa3 Outlook Actions: ..Issuer: Quebec, City of ....Outlook, Remains Stable RATINGS RATIONALE The affirmation of both the aa3 BCA and Aa2 long-term debt ratings reflects Moody's view that over the next three years Quebec City will continue to record key fiscal metrics in line with recent trends, including solid gross operating balances (GOB), and liquidity levels and stable debt burden even as it faces new pressures such as elevated inflation and rising interest rates and as it seeks to increase its capital program.During 2020 and 2021, when the coronavirus pandemic had the greatest impact on the city's operations, Quebec City posted an average GOB of 23%, which was in line with levels recorded prior to the pandemic, highlighting the city's strong management and ability to adjust to unexpected pressures. As the pandemic eases in 2022 and beyond Moody's expects the city's GOB will continue to register similar levels even as new pressures, including higher than expected inflation and an accelerated pace of interest rate increases, adds new challenges for the city to accommodate.Quebec City also maintained a stable debt burden in the past two years, with its net direct and indirect debt measuring 99.7% of operating revenues in 2021, roughly unchanged from 101.1% in 2019 despite capital spending rising during this period. Over much of the past decade the city directed an increasing amount of revenues from operations annually towards pay-as-you-go capital financing and towards debt repayment. As the city has achieved its targeted level of annual appropriations for these purposes, this will both ease the budget pressure this initiative imposed as well as provide funds to limit debt increases and therefore limit upward pressure on the city's debt burden even as capital spending ramps up over the next five years. While the city is expected to build a new tramway, currently estimated to cost CAD3.3 billion and which accounts for over half of the city's five year (2022-2026) capital plan, Moody's expects the portion funded by Quebec City to remain limited to only 10% of costs, with the provincial and federal governments funding the rest. However Moody's notes that large infrastructure projects typically face cost escalations, which could be more material in the current high inflationary environment. Under its current assumptions, Moody's forecasts Quebec City's net direct and indirect debt will remain within a range of 90-95% of operating revenue through to 2025. The city holds adequate levels of cash and investments, which cover 0.6 times (x) annual operating expenses and 3.7x annual debt service. Moody's forecasts that the city's liquidity profile will continue to provide sufficient protection to bondholders given the expectation of continued positive operating results which would negate any need to draw on reserves for operations.Quebec City's Aa2 rating incorporates the aa3 bca as well as Moody's expectation of a high likelihood of support from the Province of Quebec should Quebec City face acute liquidity stress.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook reflects Moody's assumption that the strong fiscal management of the city will continue to help navigate ongoing fiscal headwinds facing the city including rising inflation and interest rates. The stable outlook also reflects Moody's expectation that the city's debt and interest burdens will be maintained at similar levels to those recorded in the past four years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA material and sustained reduction in the debt burden combined with an increase in financial reserves (including pay-as-you-go financing) relative to outstanding debt could put upward pressure on the city's rating. Conversely, a material increase to the city's debt burden, increase in interest burden, or a significant deterioration of operating results as evidenced by consistent production of thin operating surpluses could put downward pressure on the rating.ENVIRONMENTAL, SOCIAL AND GOVERANCE CONSIDERATIONSQuebec City has a neutral-to-low E issuer profile score (E-2), reflecting neutral-to-low scores across all environmental risk categories monitored by Moody's.The city's S issuer profile score is also neutral-to-low (S-2), reflecting broadly neutral-to-low scores for most social considerations, with health and safety viewed as a positive exposure. Given city services associated to social factors follow stable and predictable demand patterns, and the city is able to offer a high quality of service delivery, social risks are minimal. The city benefits from a high overall level of health and safety considerations, for which the city is largely not responsible to fund, as primary care is a provincial jurisdiction.The positive G issuer profile score (G-1) captures Quebec City's very strong institutional and governance framework. The city utilizes prudent financing planning which allows for multi-year forecasting of key trends, providing the city with the ability to identify potential pressures and allows for sufficient time to adjust plans accordingly to mitigate any credit implications. The city provides transparent, timely financial reports and adheres to strict policies on debt and investment management.The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.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 https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Michael Yake Associate Managing Director 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 Alejandro Olivo 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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