Montreal debt undermines its credit rating, Moody’s warns

montrealThe heavy debt that drags the City of Montreal continues to undermine its credit rating, warns Moody’s rating agency. And despite the fiscal austerity efforts of the administration of Denis Coderre, the many necessary projects to retype aging infrastructure of Quebec’s metropolis to continue increasing its debt.

Moody’s announced that it was maintaining the credit rating to Aa2 from Montreal, with a stable outlook. The Coderre administration was satisfied of this evaluation, which will allow it to continue to get lower interest rates when it needs to borrow on the markets.

“They recognize the efforts that the City did well to control spending,” noted Pierre Desrochers, president of the executive committee of Montreal.

4.3
billion
Net debt of the City of Montreal

Although rating to be of “high quality”, Moody’s points out that Quebec’s metropolis is among the major lower rated Canadian cities, mainly due to its debt of 4.3 billion. Relatively speaking, this debt is greater than the average of other Canadian cities.

“This position is explained largely by the high indebtedness of Montreal and the weight exerted by the debt repayment. The City also has lower reserves for highest rated cities, “it said in the analysis of the agency.

Increased borrowing

To improve its rating, Montreal should reduce the weight of its debt, which seems unlikely with the many projects underway. Instead, Moody’s anticipates that the metropolis will have a greater reliance on borrowing in the coming years.

“The investment plan for transport, rehabilitation of streets and the water system will lead to more debt, which will add to the debt burden of the city already above average”, can we the report says Moody’s.

Pierre Desrochers said that the state of Montreal infrastructure makes massive investments essential for their maintenance. The elected also emphasizes that 75% of investments aim to repair streets, aging pipes or sewers.

In its analysis, Moody’s notes that Montreal had undertaken to reduce the weight of its debt in recent years, but it increased again in 2014. The debt was equivalent to 91.9% of revenues in the metropolis last year compared to 86.1% in 2013. This ratio is nevertheless lower than the peak observed in 2005 while it was 113.9%. Rest with the $ 4.6 billion in projects planned by 2017, Moody’s anticipates that the debt could rise to 110% of revenues in 2017 if all planned work are realized.

“The City’s debt is expected to increase over the coming years, while infrastructure projects are multiplying and the Montreal Transit Corporation has to undertake substantial work over the coming years,” evaluates the agency.

The rigor hailed

If Montreal avoids a discount, it is mainly due to fiscal austerity measures, Moody’s describes as “conservative financial management practices,” put forward by the administration Coderre. The agency sees particularly good eye “solid surplus” generated by the metropolis.

The agency, however, warns that it will carefully monitor two policies of the new city administration, the mayor is the commitment not to raise taxes beyond the inflation and pay more jobs for cash. Moody’s notes that the practice “avoid increasing the debt burden, but will increase the pressure on the current budget.” Still, Pierre Desrochers believes Montreal is on track, his administration’s commitment to reinvest the savings generated by staff reductions in yards paid in cash.

Moreover, Moody’s considers “unlikely” a discount of Montreal medium term. In reaching such a scenario, the City should generate deficit financial statements, which is far from the case. The metropolis running surpluses for several years, one observed in 2014 being the most important one for a long time.

Opposition to the City Hall, however, believes that Montreal should build on those savings to reduce its debt to avoid any discount. “The Coderre administration chose to set foot on the accelerator of debt and it puts Montreal in a vulnerable position,” says Guillaume Lavoie, Project Montreal.

The strengths and weaknesses of Montreal
Forces

+ From “strong surplus” generated year after year

+ Good support municipal government of Quebec

+ Diversified Economy

Weaknesses

– Debt above the average of Canadian cities

– High pressure Budget

– Major investments in infrastructure required

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