DBRS Confirms Toronto at AA, Despite Increased Borrowing

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of the City of Toronto (the “City”) at AA with a Stable trend, as the impact of the City’s substantially expanded capital and borrowing projections are expected to be offset by senior government funding.

Ratified by Council earlier this week, the City’s 2006 tax-supported capital budget makes Cdn$3.3 billion in spending commitments mostly spread over the next five years, focused on state of good repair projects in the areas of transit and roads. Supporting the City’s planned capital investments is a projected Cdn$1.24 billion increase in net debt, sending total net tax-supported debt up 60% to Cdn$3.2 billion, or an estimated Cdn$1,150 per capita, by 2010. This marks a substantial upward revision from the peak in debt previously indicated by the City and referenced by DBRS in last year’s credit rating report, namely Cdn$1.7 billion, or an estimated Cdn$630 per capita, by 2009.

While significant, the impact of the expanded borrowing plan should be offset by up to Cdn$325 million in annual gas tax funding introduced by the Federal government earlier this year and the Ontario government in late 2004. These fairly stable gas tax allotments are primarily intended to support environmentally sustainable infrastructure such as transit, which accounts for a significant 44% of the City’s 2006 capital budget.

As a result, the gas tax funding will enable the City to redeploy existing financial resources to service its growing tax-supported debt burden, while also leaving some flexibility to protect against unforeseen events. Nonetheless, the new debt is expected to reduce the City’s room to manoeuvre within its current rating, barring substantial new revenue sources. Consequently, another significant upward revision to the five-year tax-supported debt projection, interruption in gas tax transfers, or significant deterioration in fiscal performance could place downward pressure on the credit profile.

DBRS expects to conduct its annual credit rating review of the City in early 2006, at which time further details regarding the City’s financial profile will be provided.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.

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