PrefBlog

DBRS doesn’t like the New Brunswick budget:

DBRS notes that the Province of New Brunswick (the Province or New Brunswick; rated A (high) with a Stable trend) kicked off the provincial budget season with its 2014 budget on February 4, 2014, which calls for a slow and protracted path back to balance by 2017-18. Although last year’s budget incorporated no firm time commitment to restore balance, the plan presented in 2012-13 did point to a balanced budget by 2014-15. DBRS was aware that some slippage had been incurred in light of weak economic performance but did not expect the full extent of deterioration revealed in yesterday’s budget. As a result, the revised fiscal targets raise the possibility of as much as $400 million to $500 million in additional debt over the next four fiscal years, which was not factored into last year’s rating review. While the revised outlook is potentially manageable for the credit profile, DBRS remains concerned that continued sluggish economic growth for an extended period of time or weakening fiscal resolve could push credit metrics to levels no longer consistent with the current ratings.
…
Based on the revised fiscal forecasts, DBRS-adjusted debt is estimated to have risen by 5% in 2013-14 to $12.5 billion. As a result of Statistics Canada’s downward revisions to historical GDP figures in December 2013 combined with very slow nominal GDP growth in 2013, debt-to-GDP is forecast to reach almost 40% at March 31, 2014. The Province’s debt burden is expected to peak around 41% in 2015-16. This exceeds the peak at the time of last year’s review and, more importantly, is well above pre-recession levels of less than 30%. As a result, even if the Province successfully executes its fiscal recovery plan as currently envisioned, DBRS believes little flexibility will be left within the current rating for further erosion. Additional fiscal slippage pushing the debt-to-GDP ratio toward 45% would be cause for concern for DBRS and could result in downward pressure on the rating.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets off 3bp and DeemedRetractibles losing 9bp. A surprisingly lengthy Performance Highlights table is notable for the presence of losing Floating Rate issues. Volume was below average.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.5% (maybe a little less), so the pre-tax interest-equivalent spread is now about 275bp, the same as that reported on January 29.

This entry was posted on Wednesday, February 5th, 2014 at 9:27 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.