Reuters logo
S&P affirms Province of Quebec's 'A+' ratings
July 11, 2012 / 8:32 PM / 5 years ago

S&P affirms Province of Quebec's 'A+' ratings

Overview
     -- In our view, Quebec has good prospects to achieve a balanced budget by 
fiscal 2014 and has demonstrated its commitment to reducing debt in the 
medium-to-long term.
     -- We are affirming our ratings, including our 'A+' long-term and 'A-1+' 
short-term issuer credit ratings, on the Province of Quebec.
     -- The stable outlook reflects our expectation that Quebec's revenue and 
spending initiatives will lead to a larger operating surplus (in Standard & 
Poor's adjusted terms) and a material improvement in the province's 
after-capital deficit as a percent of total revenues in the next two fiscal 
years.

Rating Action
On July 11, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including its 'A+' long-term and its 'A-1+' short-term issuer credit ratings, 
on the Province of Quebec. At the same time, Standard & Poor's affirmed its 
'A+' senior unsecured debt rating on Financement Quebec and Hydro-Quebec (the 
provincially owned and guaranteed electric utility). The outlook is stable.

The affirmation reflects our view of the province's prospects for achieving a 
balanced budget by fiscal 2014, its commitment to debt reduction in the 
medium-to-long term, its good economic growth prospects in the next two years, 
adequate liquidity levels, and support from the federal government.   

Rationale
The ratings on Quebec are supported by what Standard & Poor's views as the 
province's large, wealthy, and well-diversified economy, which remains 
resilient in the face of continuing global economic challenges, ongoing 
support from the federal government, and exceptional access to capital markets 
that provides for positive liquidity support for the rating. The provincial 
government estimates real GDP growth to have slowed to 1.7% in 2011 from a 
2.5% gain in 2010. The government is forecasting real GDP growth to advance by 
1.5% in 2012 and a further 1.9% in 2013. While recognizing that the tenuous 
recovery in the U.S. and the European sovereign debt crisis pose risks to 
Quebec's economic outlook, we believe that the government's forecast for real 
GDP growth underpinning its fiscal plan is reasonably cautious. 

In our view, a further credit strength is the ongoing support from the federal 
government. The Government of Canada provides significant and predictable 
transfers to the provinces through the key Equalization, Canada Health 
Transfer, and Canada Social Transfer programs. In Quebec, transfers 
represented more than 22% of total revenues in fiscal 2012 (year ended March 
31), up from the 19% share recorded in 2007, prior to the onset of the global 
economic recession. This increase mainly reflects higher federal equalization 
payments, federal compensation related to the Harmonized Sales Tax, and higher 
funding for labor market programs. 

We believe that Quebec's credit profile also benefits from adequate liquidity 
levels and exceptional access to global financial markets for refinancing 
needs, thanks in large part to a well-entrenched secondary market for its 
debt. At the end of fiscal 2012, the province had estimated cash and temporary 
investments of about C$4.4 billion and a further C$4.3 billion in its 
Generations Fund. The purpose and sole use of the Generations Fund is to 
reduce the province's debt burden. Deposits come mainly from water power 
rentals from Hydro-Quebec, the province's wholly owned electric utility. The 
province also has a large sinking fund balance of C$6.1 billion, which is 
available for repayment of maturing debt issues. As well, in our opinion, 
Quebec, together with other large provincial borrowers, has benefited from a 
flight to quality in the past few years of global market turmoil. 

We believe the province's main credit challenges include the already-high 
tax-supported debt burden and its relatively large after-capital deficits. In 
fiscal 2012, the province's tax-supported debt as a percent of consolidated 
operating revenues increased further to about 189% of operating revenues or 
48% of GDP. We believe that Quebec's tax-supported debt burden, which is high 
compared with peers', will begin to decline in fiscal 2013 to about 183%. The 
province's after-capital deficit rose further to 6.8% of total revenues in 
fiscal 2012 (Standard & Poor's adjusted) from about 5.4% of total revenues in 
fiscal 2011. We expect that Quebec's after-capital deficit will improve to 
about 4.7% of total revenues in fiscal 2013. However, we believe that the 
province's progress toward a balanced budget and significant improvement in 
its after-capital deficit may face headwinds from the slowdown in the global 
economy in the latter part of 2012 stemming from the European sovereign debt 
crisis and lackluster recovery in the U.S. Any delay to Quebec's fiscal 
recovery would likely result in increased debt issuance beyond our 
expectations and exacerbate an already-high debt burden.

Outlook
The stable outlook reflects our expectation that Quebec's revenue and spending 
initiatives will lead to a larger operating surplus (in Standard & Poor's 
adjusted terms) and a material improvement in the province's after-capital 
deficit as a percent of total revenues in the next two fiscal years. We also 
expect the province to maintain its commitment to debt reduction through 
additional deposits to its Generations Fund. We believe that Quebec's 
tax-supported debt as a percent of consolidated operating revenues will 
stabilize this fiscal year at about 189% of revenues and decline in the medium 
term. A return to after-capital surpluses and a decline in its tax-supported 
debt burden, continued Generations Fund deposits, and faster economic growth 
in the next two fiscal years could lead to a positive outlook. Conversely, we 
believe that failing to maintain the debt reduction commitment, substantial 
operating and after-capital deficits beyond fiscal 2013, or the inability to 
stabilize debt burdens beyond fiscal recovery in 2014 could put downward 
pressure on ratings.

Related Criteria And Research
Methodology For Rating International Local And Regional Governments, Sept. 20, 
2010

Ratings List
Ratings Affirmed

Quebec (Province of)
 Issuer Credit Rating                   A+/Stable/A-1+     
 Senior Secured                         A+                 
 Senior Unsecured                       A+                 
 Commercial Paper
  Global scale                          A-1+               

Financement-Quebec
 Senior Unsecured                       A+                 
 Commercial Paper
  Canada scale                          A-1(HIGH)          

Hydro-Quebec
 Senior Unsecured                       A+                 
 Senior Unsecured                       AA-/Stable                
 Commercial Paper
  Canada scale                          A-1(HIGH)          
  Global scale                          A-1+               

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below