TEXT-S&P affirms Province of Nova Scotia

Mon Jun 4, 2012 1:41pm EDT

Related Topics

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)
FILED UNDER: