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Rating Action:

Moody's affirms Alberta's Aa3 ratings, revises outlook to positive

27 Apr 2022

Toronto, April 27, 2022 -- Moody's Investors Service ("Moody's") today affirmed the Province of Alberta's (Alberta) a1 Baseline Credit Assessment (BCA) and Aa3 and (P)Aa3 long-term debt ratings, and revised the outlook to positive from stable. Concurrently, Moody's affirmed ATB Financial's (ATB) Aa3 long-term issuer rating reflecting its status as agent of Alberta and the provincial guarantee of its liabilities, and revised the outlook to positive from stable. Moody's also affirmed the Alberta Capital Finance Authority's (ACFA) Aa3 long-term debt ratings, whose obligations were assumed by Alberta in 2020.

Moody's concurrently affirmed Alberta's P-1 short-term issuer and commercial paper ratings and ATB's P-1 short-term issuer rating.

Affirmations:

..Issuer: Alberta, Province of

....Baseline Credit Assessment, Affirmed a1

....ST Issuer Rating, Affirmed P-1

....Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Aa3

....Senior Unsecured Shelf, Affirmed (P)Aa3

..Issuer: ATB Financial

.... LT Issuer Rating, Affirmed Aa3

.... ST Issuer Rating, Affirmed P-1

..Issuer: Alberta Capital Finance Authority

....Senior Unsecured Regular Bond/Debenture, Affirmed Aa3 (Assumed by Alberta, Province of)

Outlook Actions:

..Issuer: Alberta, Province of

....Outlook, Changed To Positive From Stable

..Issuer: ATB Financial

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects Moody's view that the fiscal and economic rebound which began in 2021-22 could lead to a structural improvement in Alberta's credit profile, underscored by positive trajectories in both the fiscal balance and debt burden. The province projects real GDP growth of 5.4% in 2022, stabilizing to average long-term levels of approximately 3% over the following three years, based on expectations of a continued economic rebound as the province shifts from a pandemic to an endemic environment. This improvement coincides with a recent sharp increase in oil prices, which has allowed the province to accelerate its projected return to balance several years ahead of its prior target, and in contrast to Moody's previous projection of 3-4 years of additional deficits. The deficit for 2021-22 is estimated at CAD3.2 billion (5.2% of revenue), with the province budgeting this to be followed by small but consistent surpluses over the next three years of between 0.8% and 1.3% of total revenue.

The positive outlook also reflects the potential that these fiscal improvements, if they materialize, would lead to a materially lower debt burden that under Moody's previous projections given the elimination of an estimated CAD30 billion deficit financing from debt.

RATIONALE FOR AFFIRMING THE RATINGS

The affirmation of Alberta's Aa3 ratings reflects a strong institutional framework and flexibility to address fiscal pressures, stable although elevated debt burden and very strong liquidity, offset by exposure to high oil price volatility.

Alberta's credit profile benefits from a stable system of fiscal transfers from the federal government, including health and social transfers. These transfers are highly predictable and secure and increase based on pre-determined escalators and are therefore largely unaffected by economic changes, although transfers have temporarily increased since the onset of the pandemic given additional federal COVID-19 support to offset lost provincial revenues and incremental COVID-19-related expenses. The province has considerable flexibility in both revenue and expenditure measures to achieve budget targets and move forward with its plan to balanced budgets. Alberta retains access to a broad range of tax bases and the ability to alter expenditure programs. Its tax regime remains highly competitive relative to most provincial peers in respect of both corporate and personal income tax rates. Alberta does not levy a health premium or payroll taxes, and remains the only Canadian province without a provincial sales tax, supporting fiscal capacity.

The Aa3 rating also reflects an elevated although much improved debt burden. Given the projected return to balance this year, future debt issuances will reflect only refinancing and capital needs. As a result, Moody's projects that the debt burden will stabilize near pre-pandemic levels, with net direct and indirect debt estimated at between 180% to 190% of revenue over the next three years, below Moody's prior assumption of 250% to 300%. The province's expectation of only modest surpluses does not leave significant capacity for additional debt repayment, although Moody's expects that the province would prioritize debt repayment from any unanticipated surplus revenues.

High levels of capital spending will also maintain some upside pressure on debt. Capital spending will total CAD20.2 billion between 2022-23 and 2024-25, including for new large-scale healthcare initiatives, with up to 60% of the capital plan potentially financed through debt issuance. However, Moody's projects that the province would prioritize debt reduction from excess unanticipated surpluses, limiting the rise in debt levels.

At the same time, the province maintains very strong liquidity and wealth metrics relative to peers, with combined cash and investments of CAD50.1 billion in 2021-22 covering 77% of expenses and 44% of net debt. Moody's projects that these balances will continue to grow given the anticipated surpluses, providing stable coverage levels relative to rising nominal debt levels and expenses. Nearly a third of this amount is in the Alberta Heritage Savings Trust Fund, the principal of which is protected by long-standing government policy.

Key risks remain from the correlation between provincial revenues and oil prices, continued egress constraints, and high levels of capital spending. While the projected improvement in revenues materially eases fiscal pressures, the continued reliance on volatile non-renewable resources (80%-85% of natural resource revenue derives from bitumen and crude oil royalties) ? a macro factor beyond the province's control - exposes it to significant swings in its fiscal results. Although the budget reflects conservative oil prices (WTI of $70/bbl in 2022-23) relative to current market prices ($100-110/bbl), which adds upside potential to the forecasts, significant volatility in oil prices - which also reflects increased geopolitical risk - adds to forecast uncertainty. The fiscal impact of oil price changes is significant: the budget estimates that each $1 change in WTI prices has a CAD500 million fiscal impact, while a $1 change in the light-heavy differential has a CAD460 million impact.

The province's Aa3 rating takes into consideration its a1 BCA, along with a high level of extraordinary support from the Government of Canada (Aaa stable).

The affirmation of the Aa3 rating with a positive outlook of ATB reflects its status as agent of Alberta, and as a result its credit quality is captured through its relationship with the province rather than through standalone credit considerations. The affirmation of the Aa3 rating (no outlook) of ACFA reflects the rating of Alberta which assumed ACFA's debt.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

The E issuer profile score is highly negative (E-4). Alberta has a high economic and fiscal reliance on the continued consumption of fossil fuels, and therefore it is more susceptible to carbon transition risk than most other provinces. Alberta is one of the world's largest sub-sovereign polluters (GHG) from oil production with relatively few mitigants, although the province has a carbon pricing scheme in place and has made efforts to reduce GHG emissions through new carbon capture and storage projects. At the same time, exposure to physical climate risks is elevated given unpredictable weather events including droughts and wildfires which can cause significant economic damage.

Alberta's S issuer profile score is neutral-to-low (S-2). Health and safety measures and access to infrastructure in the province is strong, and housing affordability is high relative to several other provinces. Alberta has the youngest overall provincial population, which mitigates healthcare spending pressures while increasing education spending relative to other Canadian provinces. These strengths are partly offset by fiscal and economic risks caused by the pandemic, which Moody's views as a social risk.

Alberta's G issuer profile score is neutral-to-low (G-2). The institutional and governance framework inherent to all Canadian provinces is strong, with transparent reporting and disclosure. The significant rise in debt points to some risk however from budget management. Public accounts and budgets are typically prepared on a timely basis.

Alberta's ESG Credit Impact Score is moderately negative (CIS-3) reflecting highly negative exposure to environmental risks, neutral-to-low exposure to social risks and neutral-to-low governance risk.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating of Alberta could be upgraded if the province could sustain balanced results from consistent high energy prices and prudent expense controls, leading to a sustained reduction in net debt to below 180% of revenue. The outlook could be stabilized if lower energy prices or new coronavirus-related restrictions slowed economic activity, leading to a return to deficits and a slower reduction in the debt burden than Moody's anticipated. Lower than projected growth in liquidity levels could also result in stabilizing the outlook.

Upward or downward pressure on the ratings of the province would also result in symmetrical movements in the ratings of ATB Financial and ACFA. Any adverse change to its agency status could also lead to downward pressure for ATB Financial.

The principal methodology used in rating Alberta, Province of and Alberta Capital Finance Authority was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. The principal methodology used in rating ATB Financial was Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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, CFA
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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