TEXT-S&P affirms Province of Nova Scotia
Overview -- We are affirming our ratings, including our 'A+' long-term issuer credit rating, on the Province of Nova Scotia. -- At the same time, we are affirming our 'A+' issue-level ratings on Borealis Infrastructure Trust and on Scotia Schools Trust. The outlook on the Borealis debt is stable. -- The affirmation reflects our view of the province's modest but positive economic growth in 2011, adequate liquidity, and significant transfer payments from the federal government. -- The stable outlook reflects our expectation that financial results will remain weak in the next two years but eventually lead to stronger operating results after 2014, the pace of economic growth in 2012 will strengthen somewhat with rising employment, liquidity levels will remain adequate, and the debt burden will begin to decline in fiscal 2013. Rating Action On June 4, 2012, Standard & Poor's Ratings Services affirmed its ratings on the Province of Nova Scotia, including its 'A+' long-term issuer credit rating (ICR), reflecting our view of the province's modest but positive economic growth in 2011, adequate liquidity, and significant transfer payments from the federal government. The outlook is stable. At the same time, we are affirming our 'A+' issue-level ratings on Borealis Infrastructure Trust and on Scotia Schools Trust. The outlook on the Borealis debt is stable. Rationale In Standard & Poor's opinion, the ratings on Nova Scotia reflect what we consider to be the following positive factors: -- The province's economic recovery from the recession slowed in 2011 as it recorded real GDP growth of 1.2% in 2011, which was down from 1.9% in 2010. Nominal GDP rose 3.8% from 2010-2011 (which was also lower than the previous year's increase of 4.5%). Labor force results were moderately positive. The unemployment rate fell to 8.8% in 2011 from 9.3% a year earlier. Employment edged up slightly in 2011 by 0.1%--nationally, employment increased 1.6%. For 2012 and 2013, we expect real GDP gains of 1.7% and 1.9%, respectively, according to the province's projections. Nominal GDP should rise 4.8% and 3.8%, in the same period. We expect employment growth to be about 1% in 2012 and 0.6% in 2013 as the unemployment rate falls to about 7.8% in 2011 and then 7.2% in 2012. -- Liquidity levels, which strengthened in fiscal 2011 (year ended March 31), are adequate, in our view. At the end of fiscal 2011, the province held cash and temporary investments of C$1.2 billion, which was up substantially from the year previous. In addition, the province had sinking funds of close to C$2.5 billion at the end of fiscal 2012. The sinking funds complement the province's strong access to capital markets. By Standard & Poor's calculations, Nova Scotia had estimated free cash and liquid assets of about C$730 million at the end of fiscal 2011. -- Nova Scotia benefits from significant revenue support through the federal government's grant programs: Equalization, Canada Health Transfer, and Canada Social Transfer. For fiscal 2011, total transfers were C$2.9 billion and represented 33% of operating revenues, which was in line in line with shares in previous years. For fiscal 2013, we expect federal transfers to increase to about C$3.1 billion from C$2.8 billion in fiscal 2012. Partially offsetting these credit strengths are the following: -- Nova Scotia's debt burden has been increasing post-recession. At the end of fiscal 2011, tax-supported debt represented of 148% of operating revenues. We expect the tax-supported debt burden to rise slightly for fiscal 2012 to 150% of projected operating revenues but decline to about 144% in fiscal 2013. Tax-supported debt should reach 36% of projected GDP by the end of fiscal 2011. Like many Canadian provinces, Nova Scotia has a high debt burden in our opinion: At the end of fiscal 2011, the province's debt burden was higher than that of many of its international and domestic peers and the median for the 'A' rating category. The province's after-capital deficits persist despite its improving revenue picture. Nova Scotia recorded an after-capital deficit of 5% of total revenues in fiscal 2011 and a small operating surplus of close to 2% of operating revenues. Both results were an improvement on the previous year's after-capital deficit of 9% and operating deficit of 1%. We do not expect a significant improvement for fiscal 2012 owing to lower-than-previously expected provincial and national economic growth and planned rebates to the harmonized sales tax. We project near-breakeven operating results for fiscal years 2012 and 2013 and after-capital deficits in both years that could be as high as 7% of total revenues. A return to near-balance after-capital spending is not likely before fiscal 2014. Outlook The stable outlook reflects our expectation that Nova Scotia's financial results will remain weak in the next two years but eventually lead to stronger operating results and near-balanced, after-capital results after 2014. The pace of economic growth in 2012 should strengthen somewhat compared with 2011, with rising employment and a decline in unemployment rate. We expect debt burdens to begin to decline in fiscal 2013 and for liquidity levels to remain adequate. A return of after-capital surpluses (or near balance), a declining debt burden, and strengthening liquidity could lead to a positive outlook or upgrade. Conversely, we believe that continuing substantial after-capital deficits and unexpected deterioration in the province's debt burden or liquidity levels could put downward pressure on the ratings. Related Criteria And Research Rating International Local And Regional Governments, Sept. 20, 2010 Ratings List Ratings Affirmed Nova Scotia (Province of) Issuer credit rating A+/Stable/A-1+ Senior unsecured A+ Senior unsecured AA-/Stable Commercial paper Canada scale A-1(HIGH) Global scale A-1+ Scotia Schools Trust Issuer credit rating A+/Stable/-- Senior secured A+ Borealis Infrastructure Trust (Nova Scotia Learning Centre Bonds) Senior secured A+/Stable (Caryn Trokie, New York Ratings Unit)
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