DBRS Morningstar Confirms the City of Toronto’s Ratings at AA with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the City of Toronto (Toronto or the City) at AA. Concurrently, DBRS Morningstar changed the name of the Debentures, Cdn Currency rating to Long-Term Debt, and confirmed the Long-Term Debt rating at AA. DBRS Morningstar also discontinued the Debentures, Frgn Currency rating to align with the rating nomenclature used for other Canadian municipalities. The trend on all ratings is Stable.

The ratings are supported by the City’s large and diversified economy, capacity to raise taxes, and requirement to present balanced budgets. The Stable trends reflect DBRS Morningstar's expectation that, while the Coronavirus Disease (COVID-19) pandemic will materially affect the City's fiscal outlook, the impact will be temporary and manageable. This view is further supported by the announcement of $4 billion in federal/provincial funding aid to Ontario municipalities.

The City's operations will be significantly affected through 2020 by challenges arising from the pandemic. Before incorporating senior government funding support, Toronto expects to post a deficit approximating $1.9 billion for its tax-supported programs. Separately, the City has identified roughly $547.8 million in potential cost savings during 2020. In addition, Toronto will receive funding support from higher levels of governments to offset some pandemic-related budget pressures in 2020. DBRS Morningstar expects some pressure to persist through 2021, with the City estimating an opening budget deficit of $1.5 billion.

Ongoing capital investment will contribute to growth in Toronto’s tax-supported debt burden over the medium term, materially reducing flexibility within the current rating category. DBRS Morningstar-adjusted net tax-supported debt rose to an estimated $6.9 billion in 2019, or $2,344 per capita and 1.0% as a share of taxable assessment. Based on the current capital plan, DBRS Morningstar estimates that net tax-supported debt per capita will peak in 2021 at approximately $2,630 per capita, or 1.1% as a share of taxable assessment. Although manageable for the current ratings, the rising debt burden will reduce flexibility within the ratings.

RATING DRIVERS
Should pro forma debt per capita rise above $3,000 on a sustained basis, this could result in a negative rating action. A positive rating action is highly unlikely in the near to medium term.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Municipal Governments (May 13, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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