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Rating Action:

Moody's Downgrades Alberta's Rating to Aa1, Maintains Negative Outlook

25 Apr 2016

Toronto, April 25, 2016 -- Moody's Investors Service has today downgraded the Province of Alberta's long-term debt ratings to Aa1 from Aaa and its senior unsecured shelf and MTN program ratings to (P)Aa1 from (P)Aaa. At the same time, Moody´s downgraded the long-term debt ratings of Alberta Capital Finance Authority (ACFA) and the issuer ratings of ATB Financial (ATB) to Aa1 from Aaa, reflecting their status as agents of the Crown and the provincial guarantee of all their liabilities. The outlook on all ratings is negative.

Moody's also affirmed Alberta's and ATB's P-1 short-term issuer ratings.

RATINGS RATIONALE

The downgrade to Aa1 from Aaa for the Province of Alberta reflects the increased risk stemming from the deep deficits and long return to balanced budgets forecasted by the province, and the resulting rapid and substantial rise of provincial debt levels.

"The downgrade of Alberta's credit rating, along with our negative outlook, reflects the province's growing and unconstrained debt burden, extended timeframe back to balance, weakened liquidity, and risks surrounding the success of the province's medium-term fiscal plan given the outlook for subdued growth." said Moody's Assistant Vice President Adam Hardi, lead analyst for Alberta.

Alberta's recently released 2016 budget projects that the province's fiscal position will remain in deficits for a lengthy period of time as the province struggles to offset the impact of low oil prices, which have declined approximately 60% since 2014. The province anticipates that provincial economic activity will lag Canadian economic growth over the next several years, including a second consecutive year of declining economic output in 2016, which will hinder tax revenue growth.

As a result, the province now expects a deficit of CAD10.4 billion (25% of revenue) for 2016-17, followed by significant, although declining, deficits over the next several years. In addition to the fiscal pressure identified in the province's budget, there remains further risk that volatile oil prices remain below budget expectations. Although the projected deficits include a risk adjustment buffer to reflect oil price volatility, the province has forecasted that WTI crude oil prices will rise from USD42/barrel to USD64/barrel over the next three years. These prices remain above Moody's oil price forecasts for the medium-term of USD33/barrel for 2016 rising to USD43/barrel by 2018.

The success of the deficit reduction is also predicated on the success of the province's spending plan and whether the anticipated forecasts for revenue improvement and oil price recovery will materialize. Moody's sees some risk that the province will face difficulties in achieving the necessary expenditure controls or that a slower than expected oil price recovery may lead to further compression in economic activity and a slower recovery, further pressuring budgeted fiscal outcomes over the next few years.

The province will need to increase its direct borrowing in order to finance operating deficits for the first time in over 20 years, increasing borrowing by an incremental CAD5.4 billion in 2016-17, CAD8.4 billion in 2017-18 and CAD6.9 billion in 2018-19. The higher debt level is now projected to exceed the province's own self-imposed debt ceiling of 15% of GDP, which the province established only last fall. Moody's expects that Alberta's net direct and indirect debt will increase to nearly 17% of GDP in 2018-19 from 7% in 2015-16. At the same time, Moody's expects that debt will more than double to 124% of revenues by 2018-19 from 53% in 2015-16.

In conjunction with the weak economic outlook, the provincial guarantee of ATB Financial's obligations may pose additional stress on the province's level of cash and investments. ATB's gross impaired loans doubled year-over-year to 1.1% of total loans at December 2015, reflecting some deterioration in ATB's exploration and development loan portfolio. This may result in the need for increased capitalization of ATB. Although still considered self-supporting, ATB's contingent liability stemming from the provincial guarantee has increased, which is reflected in the Aa1 rating.

The Aa1 rating also reflects the province's strong but deteriorating liquidity metrics, and its fiscal flexibility to adjust revenues and expenditures. However, Moody's notes that the province has been reluctant to fully utilize its taxation powers. Although the province currently has approximately CAD35 billion in liquidity, this will fall as the Contingency Account (CAD3.8 billion forecasted for 2015-16) will be depleted during the current fiscal year, and the province has consistently stated that it will not tap into the CAD15 billion Heritage Savings Trust Account. However, with the increase in debt, this liquidity will represent a smaller level of protection to bondholders.

The Aa1 ratings on both ATB and ACFA reflect their status as agents of the province. As such, their liabilities are liabilities of the province.

Given the lengthy period of deficits, potential for weaker economic activity and continued revenue dependence on volatile oil royalties, the negative outlook reflects Moody's view that the province's fiscal health could deteriorate further.

WHAT COULD CHANGE THE RATING UP/DOWN

Given our negative outlook, an upgrade in the rating in the near term is unlikely. The outlook could be revised back to stable if the province were able to successfully contain deficits and stabilize debt accumulation resulting in stronger than expected outcomes. The rating would face downward pressure if the province failed to execute its plan to successfully control the expected deterioration of the province's financial health in terms of deficits, resulting in greater debt accumulation and a resulting decrease in the relative level of liquidity. The rating could also be downgraded if the financial health of ATB Financial deteriorated materially, increasing the risk that the province would be required to recapitalize the entity.

The methodologies used in these ratings were Regional and Local Governments published in January 2013 and Government Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Adam Hardi
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 Alberta's Rating to Aa1, Maintains Negative Outlook
No Related Data.
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