PrefBlog

It was quite a day today … I saw a flying pig, a cat with horns, and S&P upgrading Quebec:

• •We expect the Province of Quebec to extend its record of prudent fiscal policies, with strict cost controls and growing tax revenues keeping its budget in surplus and causing its debt ratios to further shrink over the next couple of years.
• •As a result, we are raising our long-term issuer credit and senior unsecured debt ratings on Quebec to ‘AA-‘ from ‘A+’, and affirming our short-term issuer credit rating at ‘A-1+’.
• •The stable outlook reflects our expectation that, in the next two years, Quebec will generate modest after-capital surpluses and reduce its tax-supported debt ratio.

…
We expect Quebec to continue benefiting from moderate economic momentum and strict cost controls, enabling it to achieve operating and after-capital surpluses of 8.7% and 1.2%, respectively, from fiscal years 2016-2020. This outlook is better than we foresaw last year, despite the government’s recent decision to hasten the elimination of the health premium tax and boost its program and infrastructure spending before the October 2018 election. While the government’s fiscal framework could change post-election, regardless of the party elected, our base-case assumption is for general continuity in fiscal policies, given the high visibility in undoing some of the fiscal checks, such as the requirement for balanced budgets and the Generations Fund that are enshrined in legislation. The province also has contingencies available within its 2017 budget, should its economic picture moderate or other spending priorities arise.

Positive operating results are allowing Quebec to deposit more than C$2 billion yearly into its Generations Fund, which we treat analytically as a sinking fund. We expect the balance in this fund to reach C$15.9 billion by fiscal 2019, up significantly from C$8.5 billion in fiscal 2016. This, alongside increasing revenues, will lower Quebec’s tax-supported debt to 211% of consolidated operating revenues by fiscal 2019. This is a major reduction from its peak of 235% in fiscal 2015. Nevertheless, even at the lower level, Quebec’s debt burden would remain high by domestic and international standards and, if it doesn’t materially decline below this projected level, would likely remain a barrier to further upgrades. We also anticipate the province’s interest expense to decrease slowly, averaging 9.3% of adjusted operating revenues from fiscal years 2017-2019.

Andrew Willis of the Globe had some very good commentary on the Home Capital settlement:

Part of the solution, announced Wednesday, is a regulatory settlement that sees Home Capital absolve the OSC of any blame for the whole mess. In a news release, Home Capital chair Brenda Eprile said the company “acknowledges that the Commission is not to blame for the events of recent months involving its liquidity position.”

I’m guessing Ms. Eprile grit her teeth while signing off on that line. But her goal is to get Home Capital moving forward, and that meant resolving regulatory issues and potential class-action lawsuits. As part of a settlement that’s going to set back Home Capital – or its insurance company – approximately $30-million, it doesn’t cost Ms. Eprile anything to give the OSC a little political coverage.

I’m also guessing that Ontario’s Premier was thrilled to see that statement, as the provincial Liberals wouldn’t want to be fighting an election next year as the party that nearly vaporized the largest lender to homeowners who can’t borrow from the big banks.
…
From the OSC’s point of view, sources say there is an equally strongly-held view that Home Capital and its legal advisers dug in their heels on the terms of the settlement and that led to the public showdown.

This view is bolstered by the fact that many lawyers believe Home Capital and its executives would have been cleared if the OSC allegations had ever been taken to a hearing. Disclosure decisions that Home Capital made back in 2015 were approved by one former OSC chair – lawyer Jim Baillie from law firm Torys, and are now being defended by another former head of OSC, Stikeman Elliott’s Ed Waitzer.

I expect that the next company announcement of a big, well-publicized negotiated settlement will include a phrase along the lines of ‘I am a running-dog lackey of the anti-investor deviationist line! I have been an unwitting dupe of the pro-inadequate disclosure camp!’ Give bureaucrats power that can be countered only by the superior political connections of the Big Banks and Big Insurers and what else do you expect?

This entry was posted on Friday, June 16th, 2017 at 11:10 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.