DBRS Downgrades City of Vancouver to AA, Negative Trend

DBRS has today downgraded the Long-Term Debt rating of the City of Vancouver (the City or Vancouver) to AA from AA (high). The trend is now Negative. The rating action is the result of the recent announcement by the City that it has started drawing on a credit facility recently set up to address the financial problems of the Vancouver Olympic Village (the Village), which is expected to boost debt substantially, along with significant uncertainty regarding the financial outcome of the project.

Today’s action removes the rating from Under Review with Negative Implications, where it was placed on January 14, 2009, following the announcement by Vancouver that it would be seeking an amendment to the Vancouver Charter to undertake borrowing for the Village as the lender had stopped advancing funds to the project in September 2008, citing cost overruns. The Village is an 1,100-unit residential complex in the Southeast False Creek area being developed to provide temporary housing to the athletes of the 2010 Winter Olympics before being converted into 250 units of social housing and 850 market units. Its budget was originally set at $750 million (excluding land costs), but it is now estimated to have jumped by approximately $125 million, based on the latest figures available publicly. A vote was subsequently held by the Legislative Assembly of British Columbia that granted the City unlimited borrowing authority for needs relating to the Village.

On February 18, 2009, the City announced it had secured a $400 million revolving line of credit, $90 million of which has so far been used to buy out the original lender to the project along with $240 million from reserves. Additionally, $134 million in construction advances have been made to the developer by the City since September 2008. This brings Vancouver’s total investment in the project to $464 million, leaving more than $400 million in additional funding required to complete the project by the November 2009 deadline. As a result, tax-supported debt is expected to grow well beyond $2,000 per capita by the end of 2009, including Vancouver’s pro rata share of net debt held by the regional transit authority, a level not consistent with a AA (high) rating. Furthermore, the sizable payments made from the reserves have significantly depleted the working capital and considerably reduced the financial flexibility of the City.

DBRS notes that Vancouver plans to market a significant portion of the units as condominiums after the Winter Olympics, which could help reduce debt to more manageable levels and replenish reserves. However, considerable uncertainty remains with respect to the City’s ability to prevent further deterioration of the project, the extent of the debt financing needed beyond the $400 million credit facility to complete the project and the value to be realized from the sale of the housing units. As a result, the downward pressure on the City’s rating is expected to remain high over the next 12 to 18 months.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.

This rating is based on public information.