DBRS Rates City of Vancouver’s CP Program R-1 (middle); Changes Long-Term Rating Trend to Stable

DBRS has today assigned a rating of R-1 (middle) with a Stable Trend to the new $550 million Commercial Paper (CP) program of the City of Vancouver (the City or Vancouver). Additionally, DBRS has confirmed the rating of AA on the City’s Long-Term Debt and changed the trend to Stable from Negative as much of the uncertainty surrounding the development of the Vancouver Olympic Village (the Village) and its ultimate effect on Vancouver’s credit profile has been resolved.

The CP program is part of a financing platform set up by the City exclusively for the development of the Village, a 1,100-unit residential complex developed to provide temporary housing to the athletes of the 2010 Winter Olympics, and backed by Vancouver since September 2008 due to difficulties between the borrower and initial lender. The facility also includes $150 million in long-term borrowing capacity used up through the June medium-term note issue, as well as a committed line of credit of up to $550 million, used partially as liquidity back-up for the CP program. DBRS notes that the limits of the CP program and the line of credit are interrelated such that at any time the cumulative balance outstanding under both facilities cannot exceed $550 million.

Thus far in 2009, Vancouver has performed in line with expectations and has had no major deviations from its budget. Since the March DBRS update, the City has also managed to prevent further deterioration in the Village project and has secured all necessary financing sources while keeping the project on schedule, with Olympic-ready completion projected by November 1, 2009 and final occupancy beginning in summer 2010. By assuming lending responsibilities, Vancouver has also materially reduced interest costs on the project, introducing a notable cushion in the cost of $875 million. As a result of these positive developments, DBRS has changed the trend on the Long-Term Debt to Stable from Negative.

The CP program is expected to be gradually ramped up over the rest of the year as Vancouver funds the Village’s remaining construction costs (estimated at $284 million) and replaces some of the investment initially made with the City’s reserves. This will bring the City’s total investment in the project to $875 million. As a result, tax-supported debt is expected to grow to approximately $1.6 billion or $2,600 per capita by the end of 2009, including Vancouver’s pro rata share of net debt held by the regional transit authority. This is up markedly from the $853 million level recorded at year-end 2008 and is relatively high compared to other DBRS-rated municipalities. Furthermore, short-term debt will account for a significant portion of the debt balance after the CP program is ramped up. However, the upward pressure on debt should subside beyond 2009 as capital expenditures are planned to return to more normal levels and the sale of housing units will start generating cash flows (at least $220 million in 2010), which the City has committed to use for debt retirement. As such, while some uncertainty remains with respect to how much of the City's investment in the project will be recovered, leverage is expected by DBRS to recede below $2,000 per capita within the next two to three years, a level more manageable for the long-term rating. DBRS also takes comfort in the relative affluence of Vancouver’s tax base and the City’s track record of solid fiscal performance.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.

This is a Corporate (Public) Finance rating.