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Rating Action:

Moody's downgrades Ontario's rating to Aa2 from Aa1; outlook changed to stable

Global Credit Research - 26 Apr 2012

Toronto, April 26, 2012 -- Moody's Investors Service has today downgraded the Province of Ontario's issuer and debt ratings to Aa2 with stable outlook from Aa1 with negative outlook, affecting approximately CAD202 billion in debt securities.

RATINGS RATIONALE

"The downgrade of Ontario's rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets," said Moody's Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario.

The province's 2012 Budget, released on March 27, 2012, maintained the timeframe back to a balanced budget at 2017-18. Given a subdued growth outlook, the fiscal plan rests largely on significant expenditure restraint. Spending growth is expected to average 1.9% per year over 2012-13 to 2014-15, then projected to decline to 1.1% over 2015-16 to 2017-18. Expense growth targets appear particularly ambitious in light of growth in expenses averaging 7% annually in the five years to 2011-12 and continued pressures on health expenses, the province's largest expense item, due to demographic pressures. Given the extended period of consolidation and the ambitious expenditure targets, in Moody's view, there are significant risks surrounding the province's ability to achieve their medium-term fiscal targets and stabilize and then reverse the recent accumulation in debt.

At March 31, 2012, Ontario's net direct and indirect debt, at roughly 215% of consolidated revenues, was at the high end of the spectrum for Canadian provinces, whose ratings reside in the narrow range of Aaa to Aa2. Given the expected continued increase in debt burden and the risks to achieving the medium-term fiscal plan, Moody's views the Province of Ontario's ratings as more appropriately positioned in the Aa2 rating category.

Nevertheless, Ontario's high investment-grade rating reflects high debt affordability and the high degree of fiscal flexibility inherent in the institutional framework governing Canadian provincial fiscal operations. The current low interest rate environment has enabled the province to issue long-term debt bearing historically low coupons. While the proportion of revenues consumed by interest payments has increased with the recent accumulation in debt, this presently remains manageable given the province's fiscal flexibility. Moreover, the province's large and diversified economy matched to a broad and productive tax base remains a source of credit strength.

Moody's P-1 rating on Ontario's commercial paper program remains unchanged.

The Province of Ontario is Canada's largest province, representing roughly 40% of national GDP. The province's population measured approximately 13.4 million in 2011.

WHAT COULD CHANGE THE RATING UP/DOWN

A rating upgrade is unlikely in the near term given the current context of continued consolidated deficits and debt accumulation. However, Moody's recognizes that the province has laid out an ambitious fiscal plan to return to fiscal balance. If the province were to successfully execute the plan and also stabilize and then reverse the recent accumulation in debt, this could put upward pressure on the rating.

A further material deterioration in the province's financial position and an inability to stabilize the debt burden over the medium term could put downward pressure on the rating. Furthermore, if debt affordability were to deteriorate due to higher-than-expected increases in debt levels or a significant rise in interest rates, the province's fiscal flexibility would be reduced, exerting downward pressure on the rating.

The methodologies used in this rating were "Regional and Local Governments Outside the US", published in May 2008, and "The Application of Joint-Default Analysis for Regional and Local Governments", published in December 2008.

Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Jennifer A. Wong
Asst Vice President - Analyst
Sub-sovereign Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

David Rubinoff
MD - Sub-Sovereigns
Sub-sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's downgrades Ontario's rating to Aa2 from Aa1; outlook changed to stable
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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