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Rating Action:

Moody's downgrades Alberta's ratings to Aa2, changes outlook to stable

03 Dec 2019

Toronto, December 03, 2019 -- Moody's Investors Service ("Moody's") has today downgraded to Aa2 from Aa1 the Province of Alberta's long-term debt ratings. At the same time, Alberta's Baseline Credit Assessment (BCA) was lowered to aa3 from aa2. Concurrently, Moody's downgraded the long-term debt ratings of Alberta Capital Finance Authority (ACFA) and the long-term issuer rating of ATB Financial (ATB) to Aa2 from Aa1, reflecting their status as agents of the Crown and the provincial guarantee of all their liabilities. The outlook on all ratings was revised to stable from negative.

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

Outlook Actions:

..Issuer: Alberta, Province of

....Outlook, Changed To Stable From Negative

..Issuer: Alberta Capital Finance Authority

....Outlook, Changed To Stable From Negative

..Issuer: ATB Financial

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Alberta, Province of

....Short Term Issuer Rating, Affirmed P-1

....Commercial Paper, Affirmed P-1

..Issuer: ATB Financial

....Short Term Issuer Rating, Affirmed P-1

Downgrades:

..Issuer: Alberta Capital Finance Authority

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Aa2 from Aa1

..Issuer: ATB Financial

....Long Term Issuer Rating, Downgraded to Aa2 from Aa1

..Issuer: Alberta, Province of

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa2 from (P)Aa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Aa2 from Aa1

....Senior Unsecured Shelf, Downgraded to (P)Aa2 from (P)Aa1

RATINGS RATIONALE

The downgrade of Alberta's BCA to aa3 and long-term debt ratings to Aa2 reflects Moody's opinion of a structural weakness in the provincial economy that remains concentrated and dependent on non-renewable resources -- primarily oil -- which causes volatility in financial performance, and remains pressured by a lack of sufficient pipeline capacity to transport oil efficiently with no near-term expectation of a significant rebound in oil-related investments. The downgrade also reflects that continued fiscal pressures, as indicated by continued material consolidated deficits at least until 2022/23, will lead to the province's debt burden stabilizing at a higher level than previously forecasted. The Aa2 rating also reflects very strong liquidity, significant fiscal capacity and a very strong institutional framework.

Moody's expects that the debt burden, expressed as net direct and indirect debt as a share of revenue, will rise in the near-term before moderating at around 190% of revenue by 2021. Moody's calculation of Alberta's net direct and indirect debt now includes debt of ACFA which was previously excluded from Alberta's net debt metrics given Moody's prior view of ACFA as a self-supporting entity. With the expected near-term dissolution of ACFA by the province, Moody's no longer considers this debt as self-supporting. While the associated increase in debt due to this revised treatment of ACFA is credit neutral, Alberta's debt burden net of the impact of ACFA is expected to be higher than Moody's previously forecasted given the province's continued challenges.

The recently elected government forecasts material consolidated deficits over the next two years, reaching a Moody's-projected 16.5% of revenues in 2019/20 and 10.9% in 2020/21 before returning to fiscal balance by 2022/23, one year earlier than targeted by the previous government. Moody's notes that the province's forecast of a cumulative 3% decline in operating expenses by 2022/23 is somewhat ambitious which will require sustained political discipline. The government is primarily targeting spending restraint to balance the budget, including shrinking the public sector and reducing funding for higher education and grants for municipalities. Revenue measures, including the reduction in the corporate income tax rate by 1% annually over four years and the elimination of the carbon tax, will pressure revenues over the next few years. At the same time, macroeconomic factors, which influence oil-related revenue growth and private sector investments in the oil sector, remain outside the control of the government. As a result, the government's fiscal projections are subject to material execution risk.

The rating also reflects the province's very strong liquidity metrics. The province has CAD 40 billion total cash and short-term investments and portfolio investments projected at March 31, 2020, covering 45% of net debt. Moody's forecasts that this level will weaken to approximately 37% over the next three years primarily as debt continues to increase, but will remain very strong relative to Canadian provincial peers.

The province's Aa2 rating takes into consideration its aa3 BCA, along with a high level of extraordinary support from the Government of Canada (Aaa stable).

The downgrade to Aa2 from Aa1 for ACFA and ATB reflects their status as agents of Alberta, and as a result their credit quality is captured through their relationship with the province rather than through standalone credit considerations.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Alberta's ratings, as well as those of ACFA and ATB Financial, reflects Moody's assumption that despite continued fiscal and economic challenges including continued deficits over the next three years, expected improvements in deficits will lead to a moderation in the pace of debt accumulation and interest burden.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

In Moody's assessment, environmental considerations are material to Alberta's credit profile and Moody's considers environmental risk to be high. Alberta's oil and gas sector is carbon intensive and Alberta's greenhouse gas emissions are the highest among provinces. Alberta is also susceptible to natural disasters including wildfires and floods which could lead to significant mitigation costs by the province. Social considerations are also important to Alberta's credit profile. Alberta is challenged by the typical social risks relating to advanced economies including healthcare, housing and education as well as very high per capita healthcare spending which exert pressure on expenditures and GDP growth. Alberta has the youngest overall provincial population which mitigates healthcare spending pressures although could require increasing education spending. Governance considerations are also material to Alberta's credit profile, but overall governance risk is low. Financial planning is prudent with forward-looking analysis, transparent public accounts, and debt management guidelines including fully hedging all foreign currency debt issuances.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward rating pressure can arise from significant fiscal improvements that allows the province to accelerate its timeline to return to balance, or from a sustained reduction in debt burden (adjusted for the anticipated impact of the dissolution of ACFA) below 170% of revenues. A sustained improvement in the outlook for the energy sector resulting in increased revenue potential for the province could also lead to upward pressure on the rating.

Downward pressure on the rating could result from a failure to successfully contain deficits, extending the timeframe to return to balance significantly beyond 2022/23. A faster than anticipated rise in debt, leading to a material, sustained increase in the debt burden, a reduction in liquidity, or a material deterioration in the financial health of its large crown corporations, including ATB Financial, could also result in downward rating pressure.

The principal methodology used in rating Alberta, Province of was Regional and Local Governments published in January 2018. The principal methodology used in rating ATB Financial and Alberta Capital Finance Authority was Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

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 entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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, CFA
Asst Vice President - 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

David Rubinoff
MD - Sub Sovereigns
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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