Moody’s affirms A1 rating of Newfoundland and Labrador, changes outlook to stable – Moody’s

Toronto, July 12, 2022 -- Moody's Investors Service (Moody's) today affirmed the A1 and (P)A1 long-term debt ratings of the Province of Newfoundland and Labrador and revised the outlook to stable from negative. Concurrently, Moody's affirmed the a3 baseline credit assessment (BCA) of the province.

Affirmations:

..Issuer: Newfoundland and Labrador, Province of

....Senior Unsecured Regular Bond/Debenture , Affirmed A1

....Senior Unsecured Shelf, Affirmed (P)A1

.... Baseline Credit Assessment, Affirmed a3

Outlook Actions:

..Issuer: Newfoundland and Labrador, Province of

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

RATIONALE FOR THE STABLE OUTLOOK

The change in outlook to stable from negative reflects Moody's opinion that despite still facing several years of consolidated deficits, Newfoundland and Labrador debt burden, as measured by net direct and indirect relative as a share of revenue, will stabilize within a range of 240-250% over the next 3-4 years. The stable outlook also reflects Moody's assessment of reduced risk that the province will need to support the Muskrat Falls electricity generation project, following a CAD5.2 billion support package provided by Canada.

RATIONALE FOR THE AFFIRMATION

The a3 BCA and A1 / (P)A1 long-term debt ratings reflect the mix of credit strengths including sufficient fiscal flexibility to achieve desired targets and strong debt management as well as credit challenges of elevated debt and interest burdens, continued multiple years of forecasted deficits and a resource-based economy that creates revenue volatility for the province.

Newfoundland and Labrador has a strong institutional framework that provides for unfettered access to a broad range of tax bases and wide discretion over expenditure decisions. As such, the province has the capacity to adjust revenue and expenditure measures to meet budget targets set out each year. In 2021-22, the province estimates that its consolidated deficit was CAD400 million (equal to 4.6% of revenue) compared to the originally budgeted deficit of CAD826 million (9.7% of revenue).

The province's debt management is considered to be strong, which aids in keeping fiscal pressure at a minimum from the elevated debt burden. With minimal exposure to foreign exchange risk or variable interest rates the province is able to plan for debt service payments far in advance. The province retains strong access to capital markets and sufficient liquidity to allow it to avoid issuing when markets are turbulent.

Nonetheless, the province has an elevated debt burden, which Moody's notes reached 275% of revenue in 2020-21. While the slower pace of debt accumulation and resilient revenues across the next 3-4 years will allow the debt burden to stabilize within a range of 240-250%, this level is still considered elevated relative to other A1-rated global peers. The high debt burden also correlates to a high interest burden which is expected to remain above 10% across the next 3-4 years, the highest among Canadian provinces.

Newfoundland and Labrador also faces ongoing deficits, including a CAD351 million (3.9% of revenue) deficit in 2022-23, before balancing the budget in 2026-27. While the province has unfettered access to a broad range of tax bases, the revenue sources of Newfoundland and Labrador are volatile and less dynamic than other provinces. Labour and income metrics, which are among the social risk metrics monitored by Moody's, are typically lower than many Canadian provinces which constrains revenue generation. Additionally, the relative importance of offshore oil royalties, which are driven by volatile global prices for oil, also add to revenue uncertainty. This reliance also exposes the province to long-term risks around the pace of carbon transition.

The A1 ratings of Newfoundland and Labrador incorporate the BCA of a3 and Moody's assumption of a high likelihood of extraordinary support from the Government of Canada (Aaa stable), should Newfoundland and Labrador face an acute liquidity stress.

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

Upward rating pressure could arise if both the debt and interest burdens were to decline materially or if the liquidity holdings of the province were to increase. Downward pressure could arise if there are material downward adjustments to the projected path back to balanced budgets. A material increase in either the debt or interest burden above Moody's current expectations would also lead to downward rating pressure.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Newfoundland and Labrador has a highly negative E issuer profile score (E-4) which largely reflects the highly negative risk stemming from the risk of carbon transition, as evidenced by the fiscal challenges raised by the volatility in oil prices. As with other Atlantic provinces, Newfoundland and Labrador also faces moderately negative risks stemming from physical climate change, as the province is subject to low scale hurricanes that move up the North American eastern coast which can bring high winds, heavy levels of precipitation and rainfall.

The moderately negative S issuer profile score (S-3) reflects the mix of severely negative demographic risk, stemming from the aging population which creates long-term pressure on health expenses, as well as moderately negative labour and income risk and neutral-to-low risk across the remaining social factors measured by Moody's.

The neutral-to-low G issuer profile score (G-2) captures the positive risk from the very strong institutional and governance framework inherent to all Canadian provinces offset by neutral-to-low risk stemming from budget management and transparency and disclosure.

The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com/documents/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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Michael YakeAssociate Managing DirectorSub-Sovereign GroupMoody's Canada Inc.70 York StreetSuite 1400Toronto, ON M5J 1S9CanadaJOURNALISTS: 1 212 553 0376Client Service: 1 212 553 1653

Alejandro OlivoMD-Sovereign/Sub SovereignSub-Sovereign GroupJOURNALISTS: 44 20 7772 5456Client Service: 44 20 7772 5454

Releasing Office:Moody's Canada Inc.70 York StreetSuite 1400Toronto, ON M5J 1S9CanadaJOURNALISTS: 1 212 553 0376Client Service: 1 212 553 1653

Read the original here:

Moody's affirms A1 rating of Newfoundland and Labrador, changes outlook to stable - Moody's