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24 Aug 2009
Approximately CAD 11.2 billion in debt obligations affected; outlook stable
Toronto, August 24, 2009 -- Today, Moody's Investors Service downgraded the Province of
New Brunswick's debt rating to Aa2, from Aa1. The outlook
is stable. The rating action reflects Moody's expectation
that the province's fiscal policies will generate sizable increases
in its debt burden over the medium-term.
Over the next four years, the province's fiscal policies are
expected to produce substantial cash financing requirements. The
four-year fiscal plan outlined in New Brunswick's 2009-10
budget anticipates accrual deficits of roughly CAD 740 million in each
of 2009-10 and 2010-11, representing approximately
10% of provincial revenues in each year. After adjusting
for non-cash items and differences between cash outlays required
for capital expenditures and amortization, these accrual deficits
translate into cash financing requirements of CAD 1.2 billion in
2009-10 and CAD 1.4 billion in 2010-11 (16.2%
and 18.8% of revenues respectively).
Despite expense restraint built into the fiscal plan, weak revenue
growth—owing to the ongoing economic downturn and compounded by
planned personal and corporate income tax reductions—is expected
to pressure fiscal outcomes. "While we expect that tax reforms
will support long-term economic growth, the tax rate reductions
will impair near-term revenue generation, impacting fiscal
outcomes and borrowing requirements," says Moody's Assistant
Vice-President Sean Marion, lead analyst for New Brunswick.
As a result of anticipated borrowing requirements, New Brunswick's
debt metrics are projected to weaken over the medium-term.
Moody's anticipates that net direct and indirect debt may increase
to over 150% of revenues over the next four years, from an
estimated 106% in 2008-09. Debt metrics of this magnitude
would remain consistent with other Aa2 rated Canadian provinces and international
"Even though New Brunswick, similar to that of all Canadian
provinces, benefits from a high degree of fiscal flexibility,
the province's long-term financial capacity to service its
debt is also conditioned by an economic base that underperforms the national
average on a number of growth, income and wealth metrics,"
says Mr. Marion.
The rating action also reflects Moody's assessment of the risks
associated with New Brunswick Power (NBP). The narrowing of NBP's
margins in recent years, in conjunction with high leverage and risks
related to the refurbishment of the Point Lepreau nuclear generating station,
represents an element of risk for the NBP. As such, NBP's
provincially-guaranteed debt, which is borrowed by the province
and on-lent to NBP, constitutes a contingent liability for
Despite these challenges, New Brunswick's credit profile remains
firmly in the high investment-grade category. The national
operating environment in which New Brunswick operates is strong and suggests
a minimal level of systemic economic, financial and political risk.
Moreover, the high investment-grade rating remains supported
by the high level of fiscal policy flexibility inherent in the institutional
framework governing how Canadian provinces operate, which allows
provinces to adjust revenues or expenses as required to address challenges.
At Aa2, New Brunswick's debt rating is equivalent to those
assigned to the other Atlantic provinces, as well as Quebec.
The last rating action with respect to New Brunswick was taken on November
14, 2006, when its debt rating was upgraded to Aa1,
The principal methodologies used in rating this issuer were "Regional
and Local Governments Outside the US" and "The Application of Joint Default
Analysis to Regional and Local Governments", which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
Asst Vice President - Analyst
International Public Finance
Moody's de Mexico S.A. de C.V
Moody's Downgrades Province of New Brunswick's Debt Rating to Aa2
International Public Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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