DBRS Rates the City of Montreal at A (high)

Dominion Bond Rating Service (“DBRS”) has today assigned an Issuer Rating of A (high), with a Stable trend, to the City of Montréal (“Montréal” or the “City”). The trend is Stable.

Due to sustained spending discipline and prudent budgeting practices, the City has maintained a track record of solid operating performance, highlighted by the consistent DBRS-adjusted core surpluses recorded over the past several years. As the economic engine of the Province of Québec, Montréal also benefits from a strong, dynamic economy. According to Statistics Canada’s most recent survey, the Montréal economy is the most diversified in the country, which fosters stability in fiscal revenue and economic activity. Also positive to the profile are the somewhat more limited responsibilities of the City for economically sensitive programs, and the marked strengthening observed in financial management policies in recent years.

Montréal’s considerable debt burden significantly limits financial flexibility and weakens its credit profile, however. Estimated at Cdn$1,579 by DBRS, net tax-supported debt per capita notably exceeds that of all other large Canadian municipalities, translating into heavy interest charges. Like most other Canadian cities, Montréal also faces the daunting task of renewing its infrastructure base, which has considerably suffered from years of under-investment. Investments of Cdn$10 billion are forecasted over the next 20 years for water-related projects, and Cdn$4 billion over ten years for roads, which, without a marked increase in senior government funding, could put significant pressure on Montréal’s indebtedness and credit profile. Unfunded pension liabilities also remain a problem, amounting to a significant Cdn$950 million at year-end 2004, although higher contributions and the refinancing of a portion of the liabilities with debt should help improve the sustainability of the plans.

DBRS notes that the City remains in a sound fiscal position in 2005, with the budget pointing to an operating surplus of nearly Cdn$400 million for the year, primarily supported by spending prudence and solid revenue generation. Due to a 17% projected increase in capital investments, however, a modest core shortfall may be recorded (after capital expenditures). While the City’s commitment to fiscal soundness is expected to remain strong going forward, ongoing operating and capital expenditure pressures are likely to lead to tightening fiscal flexibility. As such, DBRS believes continued spending restraint and efficiency improvements will be essential to avoid undue reliance on tax increases.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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