Research: Rating Action: Moody’s affirms New Brunswick’s Aa2 rating, assigns positive outlook


Toronto, July 06, 2022 — Moody’s Investors Service (“Moody’s”) today affirmed the Aa2 and (P)Aa2 long-term debt ratings of the Province of New Brunswick. The outlook was changed to positive from stable. At the same time, Moody’s upgraded the baseline credit assessment (BCA) of the province to aa3 from a1. Concurrently, Moody’s affirmed the Aa2 long-term debt ratings of New Brunswick Municipal Finance Corporation (NBMFC) and changed the outlook to positive from stable.

Affirmations:

..Issuer: New Brunswick, Province of

…. Senior Unsecured Regular Bond/Debenture, Affirmed Aa2

…. Senior Unsecured Shelf, Affirmed (P)Aa2

..Issuer: New Brunswick Municipal Finance Corp.

….Senior Unsecured Regular Bond/Debenture, Affirmed Aa2

….Backed Senior Unsecured Regular Bond/Debenture, Affirmed Aa2

Upgrades:

..Issuer: New Brunswick, Province of

…. Baseline Credit Assessment, upgraded to aa3 from a1

Outlook Actions:

..Issuer: New Brunswick, Province of

….Outlook, Changed to Positive from Stable

..Issuer: New Brunswick Municipal Finance Corp.

….Outlook, Changed to Positive from Stable

RATINGS RATIONALE

The upgrade of the BCA to aa3 from a1 reflects the province’s improved governance which contributes to its positive fiscal performance. New Brunswick has posted positive consolidated fiscal outcomes since 2017-18 and has budgeted for continued positive outcomes through 2024-25. Although the province benefited from additional federal transfers during the past two years in which the coronavirus pandemic was most prevalent, the positive outcomes in these years also reflects the strong fiscal management undertaken by the province, notably on cost controls for non-pandemic related areas. Moreover, the province’s prudent debt management practices, as evidenced by its limited exposure to variable interest rates and efforts to increase debt maturity in recent years, will help to limit the impact of rising interest rates. In Moody’s opinion, the positive fiscal results and prudent debt management practices reflect a high level of governance and management, which is reflected in the stronger BCA and the G-1 Issuer Profile Score assigned by Moody’s as part of their ESG risk assessment.

The affirmation of the Aa2 ratings reflects Moody’s opinion that, notwithstanding the improved governance, overall credit risks continue to be on par with other Aa2 rated global peers. Among the credit strengths of the province are a modest debt burden, a relatively strong level of liquidity and a forecast path of balanced budgets.

Moody’s estimates that the province registered a debt burden (measured as net direct and indirect debt relative to revenue) of 115% in 2021-22. This is forecasted to be the third lowest debt burden among Canadian provinces. The forecast of balanced budgets through 2024-25 will further help the province maintain a strong control on debt which is expected to only be issued to support the province’s capital plan.

New Brunswick also posts relatively solid liquidity, recording the third-strongest levels among provinces for cash and investments relative to both operating expenses (0.3x coverage) and net direct and indirect debt (0.2x).

Offsetting these strengths is the key credit challenge of a relatively weak economy which limits revenue generation for the province. New Brunswick typically posts weaker employment and household income metrics relative to the Canadian average, with GDP per capita consistently near 80% of the national level. This reduces the province’s ability to generate revenue and accumulate wealth, which limits its capacity to react to negative shocks to the budget plan relative to provinces with more robust revenue generation.

The Aa2 ratings of New Brunswick incorporates the BCA of aa3 and Moody’s assumption of a high likelihood of extraordinary support from the Government of Canada (Aaa stable), should New Brunswick face an acute liquidity stress.

The affirmation of the ratings for New Brunswick Municipal Finance Corporation reflects the close operational and financial linkages between the province and NBMFC, including shared Treasury management and the province’s guarantee on all NBMFC debt rated by Moody’s. As such, the credit profile of NBMFC reflects the ratings of the province.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook for the province of New Brunswick reflects Moody’s forecast that New Brunswick should succeed in adhering to its budget plan resulting in a modest fiscal surpluses, along with maintaining a relatively stable financing requirement for capital projects, the province’s debt burden could stabilize and remain below 120% over the next 3-4 years, which would place the province in line with Aa1 peers. Moody’s will monitor the province’s ability to offset the rise in new global macroeconomic pressures, including the high inflationary environment, rising interest and slowing global economic activity, over the next 12-18 months.

The positive outlook for New Brunswick Municipal Finance Corporation reflects the positive outlook for the province.

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

Upward pressure on the rating could arise if evidence emerges that the province’s debt burden can be sustained at 120% or less of revenue or if the province were to record a period of consecutive cash financing surpluses that materially increased liquidity to offer greater protection stemming from its weaker revenue generation.

Given the positive outlook, a downgrade is unlikely. The outlook could revert back to stable if the province were to record material consolidated deficits, indicating stronger than anticipated global macroeconomic pressures and an inability of management to adapt to unplanned pressures, or if the debt burden were to exceed 120% of revenue.

Upward or downward pressure on the ratings of the province would also result in symmetrical movements in the rating of New Brunswick Municipal Finance Corporation. Any changes that weaken the relationship between the province and NBMFC would also lead to downward pressure.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

The E issuer profile score for the province is moderately negative (E-3), reflecting moderately negative risk from carbon transition, natural capital and physical climate risk.

The moderately negative S issuer profile score (S-3) reflects moderately negative risks stemming from unfavorable demographic trends and labor and income metrics.

The positive G issuer profile score (G-1) captures the positive risk from New Brunswick’s very strong institutional and governance framework. The positive fiscal performance prior to, during and post-pandemic highlights the province’s strong budget management.

The ESG factors for New Brunswick Municipal Finance Corporation reflect those of the province given the very close linkages between NBMFC and the province and the overlay of the environmental and social footprint of both entities.

The principal methodology used in rating New Brunswick, Province of was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. The principal methodology used in rating New Brunswick Municipal Finance Corporation was Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.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 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 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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 Yake
Associate Managing Director
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

Release 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

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