Vancouver – Another Agency Puts Vancouver on Credit Watch

Moody’s joins Standard & Poor’s in revising outlook to ‘negative,’ citing city’s financial risk over athletes village project

VANCOUVER — The City of Vancouver has now been hit by a double credit whammy over its stake in the troubled Olympic village project on the shores of southeast False Creek.

Just two weeks after debt rating agency Standard & Poor’s placed the city on a credit watch because of the city’s decision to assume financing and guarantee completion of the cash-poor billion-dollar development, Moody’s Investor Service yesterday did the same thing for the same reason.

Moody’s revised the city’s normal stable outlook to “negative,” and held out the possibility that the long-time triple-A credit rating the agency has assigned to Vancouver could be downgraded.

“No one knows how this is going to turn out,” said David Rubinoff, senior vice-president of international public finance for Moody’s Canada Inc. “But the city has certainly absorbed some risk, and that risk gives us some concern.”

Since the project developer’s financing was cut off last fall by its New York-based lender, the city has poured $100-million into the development to keep construction going. At the same time, Vancouver is seeking to borrow at least $458-million in additional funds to finish the athletes village in time for the 2010 Winter Olympics.

Moody’s said the cash injections have led to “an immediate deterioration” in Vancouver’s liquidity position because of its dwindling cash reserves.

“In Moody’s view, the city’s decisions have led to a situation where the city is now exposed to risks associated with a real estate project as opposed to typical city operations,” the agency’s statement says.

“This exposure is roughly 1.5 times the city’s current tax-supported debt.”

While Mr. Rubinoff stressed that no decision has been made to lower the city’s credit rating, he said any downgrade would likely affect the interest Vancouver may have to pay on bonds it plans to issue to help finance the village project, which must be finished by Nov. 1.

“Typically, the higher the credit rating, the lower the interest rate the city would have to pay on bond issues.”

After the Olympics are over, 750 of the 1,100 condominium units will be sold at market value. However, the rapid slump in real-estate sales and prices casts uncertainty over whether the project will turn a profit or break even. Mayor Gregor Robertson said he is not surprised that both Moody’s and Standard & Poor’s have put the city on a credit watch.

“They are responding to the fact we are at risk here, that 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 this risk, that’s the reality of it. I wish we didn’t have that kind of risk built in, but we do.”

Mr. Robertson agreed that the slight dip in the credit agencies’ confidence could cost the city 25 to 30 basis points in higher borrowing rates.

Mr. Rubinoff acknowledged that Vancouver may recover its investment from post-Games condo sales, but warned that “substantial risks” remain because of the possibility of a poor market.

“That could result in some measure of liability becoming tax supported.”

He added that Moody’s has been aware of the financial risk arising from the Millennium Development Corp. project since Estelle Lo was still Vancouver’s chief financial officer. Ms. Lo resigned last fall after outlining concerns over the city’s growing financial entanglement.

“We did deal with Estelle Lo,” Mr. Rubinoff said . “We were quite aware this contingent liability was out there. It’s something we learned about many months ago.”

Source: Global and Mail