DBRS Downgrades the City of Hamilton to AA, Trend Now Stable

DBRS is downgrading the long-term rating of the City of Hamilton (the “City” or “Hamilton”) to AA from AA (high), and changing the trend to Stable from Negative. This rating action comes as a result of continued expectations of rising capital requirements going forward as well as significant tax-supported borrowing over the next two years to help finance an ambitious capital spending plan. While an expansion in financial support from senior governments appears to be forthcoming, sufficient relief is unlikely to be provided in time to avert a significant increase in the City’s net tax-supported debt burden. Nonetheless, the City’s financial profile is still expected to remain fairly solid, supported by: (1) a track record of good fiscal management that has helped to foster a strong liquidity position; (2) an increasingly favourable environment for businesses; and (3) ownership of an attractive asset – the Hamilton Utilities Corporation.

While financial statements for 2003 were not available at the time of this press release, limited revenue growth combined with sustained spending pressures are expected to have produced a modest core deficit (after capital expenditures). However, an improvement is likely to be seen on the debt side, as the City deferred all planned borrowing until loans at subsidized rates become available from the Ontario Strategic Infrastructure Financing Authority (“OSIFA”) in 2004. As a result, net tax-supported debt likely declined modestly from its level of $173 million or $348 per capita at December 31, 2002.

Faced with significantly increased spending requirements and little natural revenue growth, the City was compelled to raise the property tax levy by 5.9% to balance its 2004 operating budget. Due to the City’s substantial capital plan that includes construction of the Red Hill Valley Expressway and a Solid Waste Management Master Plan, approximately $90 million in tax-supported debt is likely to be taken on this year, one- quarter of which should be obtained through an OSIFA loan.

While the City’s financial profile is expected to remain solid over the medium term, considerable spending pressures may bring about moderate core deficits in the absence of substantial new revenue sources. As well, increased borrowing requirements linked to the medium-term capital spending plan are projected to push total net tax-supported debt above the $540-mark on a per capita basis over the next couple of years – a level not consistent with the AA (high) rating. Meanwhile, uncertainty has been introduced into the economic and fiscal outlook by Stelco Inc.’s (“Stelco”) filing for bankruptcy protection earlier this year. Although Stelco is currently in the process of restructuring, it remains in a critical situation. Liquidation or substantial job losses at Stelco may lead to a material weakening in Hamilton’s economic fundamentals, possibly leading DBRS to review its position regarding the City’s credit profile.

Dominion Bond Rating Service (DBRS) will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, please contact us at: info@dbrs.com.

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