PrefBlog

Change and confusion all ’round! Last Friday, Quebec was upgraded. Today Saskatchewan is downgraded:

• •Weaker commodity prices and elevated capital spending are negatively affecting the Province of Saskatchewan’s budgetary performance and debt burden.
• •As a result, we are lowering our long-term issuer credit and senior unsecured debt ratings on Saskatchewan to ‘AA’ from ‘AA+’ and affirming our ‘A-1+’ global scale and ‘A-1(High)’ Canada scale short-term ratings.
• •The stable outlook reflects our expectation that, in the next two years, as Saskatchewan realizes positive results from its revenue measures and cost efficiencies, its budgetary performance will continue to stabilize, leading to near-balanced operating balances and declining after-capital deficits of less than 10% of total revenues

…
The downgrade reflects the province’s weakened budget performance and growing debt burden, which are symptoms of low commodity prices in two of
Saskatchewan’s key economic sectors: oil and gas, and potash. Low commodity prices have prompted the province to implement tax reforms and cost control targets, which are expected to support an improvement in budget outcomes. However, despite these efforts, Saskatchewan’s budget trajectory is now weaker than it was last year, due to slower economic growth and higher near-term capital spending intentions under its Saskatchewan Builds Capital Program. We now expect Saskatchewan’s after-capital balances to remain negative over the next two years. We also expect new borrowing requirements tied to SaskBuilds and government-related entities (GREs) to cause its tax-supported debt burden to approach 150% of consolidated operating revenues, which is high compared with similarly rated international peers’.

We expect Saskatchewan will record, on average, a modest operating deficit of about 2% of operating revenues and an after-capital deficit of 10% of total revenues for fiscal years 2016-2020. We expect that new revenue measures, such as eliminating certain exemptions and increasing the provincial sales tax, will help to mitigate the negative influence of weak commodity prices, leading to a steady improvement in budget outcomes over the next two years. Saskatchewan is forecasting operating revenue growth of 3.7% per year, on average, between fiscal years 2018 and 2020. On the expense side, considering continued spending control and a projected return to more moderate levels of capital spending in the outer years of our forecast, we expect that the province’s after-capital budgetary performance will moderately improve. Saskatchewan is projecting an operating expenditure decline of 1.2% in fiscal 2018, followed by expenditure growth of 1.2% per year, on average, between fiscal years 2019 and 2020.

PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.60% (maybe a little over) and so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a widening from the 290bp reported June 14.

This entry was posted on Wednesday, June 21st, 2017 at 10:00 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.