Another Downgrade

On 26 May, U.S.-based Standard & Poor’s dropped the Province of Alberta’s credit rating two notches to A+.  The Report [Standard-and-Poors-2017-0526-Credit-Analysis-Report]  cites continuing budgetary deterioration and growing debt as the causes of the downgrade. The downgrade comes as no surprise although the drop to A+ from a AAA only four or five years ago is distressing for Alberta taxpayers.  This distress is manifest in the double whammy of historically high borrowing levels and borrowing costs that are now higher than British Columbia, Ontario,  and Quebec, the latter two provinces seen by some analysts as “fiscal basket cases.”

As the Table below illustrates, for a provincial government bond maturing in about seven years, Alberta’s June 1, 2024 bond is trading to yield 1.795 semi-annually, which is higher than the bonds of similar maturity dates of all the provinces listed. Although 10 basis points (one basis point is one-one-hundredth of one per cent) may not sound like a lot- over many years and ten of billions, these numbers add up rather quickly. (Ten basis points on $10 billion a year is $10 million.)

 

Province Maturity Date Yield
Alberta 01-Jun-24 1.795
British Columbia 18-Dec-23 1.617
Ontario 02-Jun-24 1.748
Quebec 01-Sep-24 1.773
Manitoba 02-Jun-24 1.79
Saskatchewan 03-Jun-24 1.745
Source: RBC Direct Investing 2 June 2017


Standard and Poor’s downgrades Alberta credit27-5-17 GM

S and P hits Alberta with another credit downgrade27-5-17 EJ

This fiscal year (since 1 April 2017) the Province has borrowed $2.25 billion in term debt. As of 2 June 2017, total term debt outstanding was slightly over $50 billion.

The figure below includes debt borrowed on behalf of other entities such as the Alberta Capital Finance Authority (ACFA) and Alberta Treasury Branches (ATB Financial). These entities in turn lend the funds to municipalities and other institutions such as airports authorities and to Alberta consumers and businesses. About $18 billion of total lending is borrowed for other entities.  As such these entities have offsetting assets (e.g. loans) from which the proceeds will be used to retire this debt. Thus total direct debt is approximately $32.4 billion (at current exchange rates) is direct debt that will be funded from future taxes and fees and possibly more borrowing.  The latter source of funding is known as “re-funding.”

Alberta Term Debt Outstanding  at 2 June 2017 (millions) Total ($) Exchange Rate Total $ CAD
Total Australian dollar debt outstanding 200 1.0033 200.66
Total Canadian dollar debt outstanding 40,278 40,278
Total Euro debt outstanding 637 1.5218 969.38
Total British Pound Sterling debt outstanding 650 1.739 1,130.35
Total United States dollar debt outstanding 5600 1.3504 7,562.24
Source: Alberta Treasury Board and Finance, Term Debt Outstanding as of 2 June 2017 $50,140.63

 

http://www.bankofcanada.ca/rates/exchange/daily-exchange-rates/   2 June 2017

[Note: The computation of the total Canadian dollar debt outstanding does not take into account currency swaps that are routinely entered into when a foreign borrowing is undertaken. The total foreign currency debt is converted using the 2 June 2017 exchange rates published by the Bank of Canada.]  

Budget 2017 showed a total of $18.7 billion in borrowing this fiscal year. According to the table on page 119,  the province’s financial requirements this fiscal year are, respectively,  $5.95 billion for capital purposes; $6.4 billion for the “fiscal plan;”  $2.5 billion for ATB Financial; $3.05 billion for ACFA; $481 for the Alberta Petroleum Marketing Commission; and $315 million for the Agriculture Financial Services Corporation.  This year there is no requirement for re-funding maturing issues.  However in fiscal 2019-2020, $3.8 billion must be re-funded.

The next few years will be a busy time for the Alberta government’s debt managers.

 

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