Olympic Village gives city Moody's Blues

While Ottawa was doling out cash Tuesday, city hall was learning that the outlook on its prized AAA debt rating has been revised to negative by rating agency Moody’s Investors Service.

It’s a direct result, the agency said, of risk exposure related to the construction of the Olympic Village project.

"In Moody's view, the city's decisions have led to a situation where the city is now exposed to risks associated with a residential real estate project as opposed to typical city operations," the Moody folks said in a press release.

"This exposure is roughly 1.5 times the city's current tax-supported debt."

The city could get a downgraded rating, Moody's said, if the Olympic Village suffers from additional cost overruns or if there's a "further deterioration in the Vancouver real estate market."

A downgraded credit rating could hit Vancouver taxpayers in the pocketbooks.

Vancouver Mayor Gregor Robertson today guessed it would cost 25 to 30 basis points in interest. According to the city's director of finance, Ken Bayne, that could equate to $250,000 to $300,000 for every $100 million of debt the city takes on.

"For the city’s normal capital expenditure program this could add $0.75 to $1.0 million annually to the borrowing program over the next few years," Bayne wrote in a city report last week.

The Olympic Village issue is already causing the city headaches with its other credit rating agencies. Standard & Poor's put the city on credit watch a few weeks back. And the city's AA (high) rating with DBRS is now "under review with negative implications," after the province granted unlimited borrowing authority to help finance the village.

Speaking with reporters today, Robertson said rating agencies weren't overreacting.

"They're responding to the fact we are at risk here," Robertson said. "The taxpayers of Vancouver are at risk on this project. Until we get it refinanced, until the market changes, until we deal with some of these risks, that's the reality of it. I think they're just aware of the risk taking place here on this project."

Here's what Moody's said today:

Moody's Investors Services Global Credit Research
Rating Action
27 JAN 2009

Rating Action: Vancouver, City of

Moody's Revises Outlook on City of Vancouver's Aaa Rating to Negative

Approximately CAD 478 million in debentures affected

Toronto, January 27, 2009 -- Moody's Investors Service has revised the outlook on the City of Vancouver's Aaa debt rating to negative. The change in outlook is prompted by the city's exposure to risks related to the construction of the Olympic Village for the 2010 Winter Olympic Games. In Moody's view, the city's decisions have led to a situation where the city is now exposed to risks associated with a residential real estate project as opposed to typical city operations. This exposure is roughly 1.5 times the city's current tax-supported debt.

The change in outlook also reflects an immediate deterioration in Vancouver's liquidity position, stemming from the city's cash injections into the Olympic Village project. As of January 2009, the city has provided CAD 105.0 million in construction financing, reducing the city's cash reserves by an equivalent amount. Significant additional construction financing will have to be provided over the next year. "The city may recover the totality or a portion of this amount once condominium units are sold after the 2010 Olympic games; however, substantial risks remain respecting the commercial aspects of the condominium project and could result in some measure of this liability becoming tax-supported" says Moody's Senior Vice President David Rubinoff, lead analyst for the City of Vancouver. The city is exploring various options to raise the financing necessary to complete the project.

Moody's will monitor the city's decisions respecting the financing of the development. Factors that could lead to a downgrade of the city's Aaa rating include additional cost overruns, which would increase the total amount of the financing required to complete the project and the likelihood that the related debt could become tax-supported. Further deterioration in the Vancouver real estate market, which would also increase the likelihood that the project-related debt would become tax-supported, could also lead to a downgrade of the city's Aaa rating.

It is unlikely, however, that a future rating action by Moody's would result in a downgrade of more than one notch. "Vancouver has a proven track record of strong fiscal performance and we consider this event to be a one-time occurrence," says Mr. Rubinoff. Even if a significant portion of the project-related debt were to become tax-supported, the city's debt profile would remain moderate relative to other Canadian and international cities, supporting a high investment-grade rating. Vancouver's rating also benefits from Moody's assessment of a very high likelihood of support from the provincial government should the city face extreme financial circumstances.

The City of Vancouver is located in the province of British Columbia, on Canada's Pacific coast. The city's population reached approximately 610,000 inhabitants in 2007; population of the Greater Vancouver Area measures approximately 2.1 million.

The last rating action with respect to Vancouver was taken on November 14, 2006, when its Aaa rating was affirmed with a stable outlook.

The principal methodologies used in rating this issuer were "Regional and Local Governments Outside the US" and "The Application of Joint Default Analysis to Regional and Local Governments", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.