The only surprise contained in Moody’s decision to downgrade
the Province’s credit rating from Aa3 to Aa2 was that it wasn’t lower. Whether
the Ball Administration realizes it or not, Moody’s incomplete analysis of the
province’s fiscal position constitutes a small break for a crowd that has so
far handled the crisis with hamfisted dexterity.

Possibly it is no break at all. The “market” may well be
ahead of companies engaged in the bond credit rating business.  After the U.S. mortgage meltdown in 2007/8,
precipitating the U.S. financial crisis (when bondholders discovered they held
useless “paper” based upon unwarranted high ratings), no
one would be surprised if investors were a tad more savvy these days.

Certainly, if the recent record of borrowing by the Province
— which is still dominated by short-term treasury bills (T-Bills) — is any
indication, this is a place under careful scrutiny.

Still, for an outfit of Moody’s reputation, it is surprising
how poorly it accounted for the so-called “equity” flowing into the Muskrat
Falls project.

The CBC recently reported on an interview with Michael Yake, a vice-president and senior
analyst with Moody’s, which included these comments:

….the driving factor in the downgrade
has been the slump in oil prices, but that the troubled Muskrat Falls
megaproject played a small role.  “It
is a component,” he said. The debt
associated with Muskrat Falls’ ballooning construction costs was not figured
into the downgrade, as Moody’s sees Nalcor as financially self-sufficient from
the province
(emphasis added)

It seems
matters fictitious are every bit as real on Wall Street as they are on Water

Only the slump in oil prices bothers Moody’s? Not godawful fiscal
management? Not overruns on the Muskrat Falls project? 

And how does Moody’s arrive at “Nalcor self-sufficient from the Province…”?

story added this notation:
“We have to recognize that there
is a large debt burden building up in Nalcor as well, that ultimately the
province may be responsible for,” Yake said. “If we do see that the
province needs to step in and start supplying ongoing, regular support payments
to Nalcor for whatever reason, than
[sic] that may change
our definition of self-supporting.”

Hasn’t most
of the $5.9 billion for Muskrat Falls — the amount in excess of the $5 billion
Federal Loan Guarantee and Emera’s equity investment in the LIL — been raised by the Department of Finance, not by Nalcor,
and the sum added to the direct debt of the province?

Yake must
have been deaf when Nalcor’s Ed Martin was forced to admit that the project is
off the rails and when CEO, Stan Marshall, announced a new price tag of
$11.4 billion while offering no guarantee that the figure would not increase.

In addition,
Nalcor lost money in the last fiscal year. And the province is sending the
crown corporation funds to meet its obligations as an oil barony. 

These are
matters of public record. Surely Moody’s is aware of those facts.

And that is
just one side of the laughable analysis that Nalcor is “self-sufficient”.

Does Moody’s
subscribe to an accounting practice used by government which assumes that none
of the debt raised for Muskrat should be written down, regardless of how high the
final cost or the implausibility that ratepayers will be able to support the project through their power bills, even if the debt must be

On what basis is Nalcor related debt separated from the net debt of the Province, except by the accountants sleight of hand?

If the “self-sufficiency” claim has validity Moody’s must also believe that the Power Purchase Agreement (PPA),
the “take or pay” arrangement designed by Nalcor to impose the full cost of the
Muskrat Falls project on Island ratepayers, has the currency of enforceability.

Does the
Firm not know that Stan Marshall has already invoked the necessity to find ways
to reduce the 21.4-cent per KWh power connected with the new price tag, in order to
avert the clear-cutting of the entire region from Clarenville to St. Anthony —
as every wood stove ever abandoned to modern convenience is again pressed into

Moody’s aware that Fortis Inc.’s subsidiary, Newfoundland Power, has filed an
application with the PUB for a higher return on its transmission assets,
fearing that “demand compression” will weaken the company’s profitability?

Does the
Application not have a connection with the doubtfulness of Nalcor’s very
survival as it struggles with a reality that glibness can’t obscure — the
elasticity of demand?  

Of course, that’s for later. It is sufficient to wonder how Moody’s got beyond the simple fact that Nalcor
is a ward of the state today!

Perhaps it’s
an impolite question, but I’ll ask it anyway: even after the 2007/8 economic
meltdown, does bullshit still sell in New York?

You see, Moody’s
rating of the Province’s credit is important, even if some think that the risk
of an incomplete credit review belongs entirely to the creditors.  The public relies upon such ostensibly independent
analyses as an early warning system, too. They constitute a check on the state of the province’s fiscal management.

There are a plethora of reasons why the public might want to assess
the state of public finances. They might even be investors.

It would not
be helpful if Moody’s was insufficiently diligent with the NL file. 

A compelling
question is how the public should square an Aa2 credit rating with the
Finance Department’s seemingly intractable problem of obtaining long-term debt

this blogger obtained a response to an application under ATIPPA to the Department
of Finance. It sought records of both short- and long-term financing raised
since the Liberals came to power.

A review of
the Exhibits (below) confirms a major reliance upon 30-60-90 day T-Bills to
finance government operations. In addition, the list of bonds floated
suggests that “long-term” is now interpreted to mean as short as 3, 4 and 5

The Exhibits
depict the daily struggle being waged within the Finance Department to meet
government’s huge spending commitments. Indeed, they expose a system
under threat of collapse as the result of a single hiccup in the debt markets
— something totally beyond our control (except by controlling spending).

Perhaps the
whole issue is moot. Perhaps Moody’s ratings, like those of its two
counterparts — DBRS and Standard and Poor’s — merely fill a statutory
requirement having more form than function.

Whatever the
case, the subtleties of the world of high finance seem to constitute the
perfect counterpart to the flatfooted movements for which the Ball Government is

Even if
Moody’s has a sleepy vice-president, its brief does contain some warnings that
suggest we have work to do if we want to hold onto our Aa2 credit rating.

The agency notes
that “the outlook on the ratings remains negative”. It forecasts “that the
province’s net direct and indirect debt, relative to revenues, will approach 240%
by 2020/21, the highest forecasted level of Canadian provinces.”

It states that,
even if the 2016 provincial budget plan is successful, the Province will still
“see deficits through 2022/23…”, that “the province’s target of fiscal balance
by 2021/22 will require even greater measures”, and adds that its “negative
outlook also reflects the forecast that Newfoundland and Labrador will have
fully exploited…” its fiscal flexibility. In other words, any tax room has been

Hence, a
reduction in revenues or the failure to meet its spending targets could result
in a further ratings downgrade, within “eighteen months or less” according to Yake.

Moody’s may not have figured out all the details of this province’s sorry fiscal picture. But based upon the Premier’s most recent comments that the fall budget  “is not about cutting” even New York will soon wonder if our bonds deserve the same ratings as our politicians. 

An analysis of the borrowings listed below should make us worry the market has already drawn that conclusion.  



Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?


  1. I worked for a billion dollar company that was insolvent, had never made a profit since the IPO, consistently failed to provide financial statements blaming software system problems and it was internally preparing for bankruptcy. Thousands of employees knew this. The ratings agencies surely knew. Meanwhile, the stock was consistently rated investment grade with highly improbable price targets. It had a great rating up until the day it declared bankruptcy. There was a very close relationship between the ratings agencies, those who prepared the initial public offerings and various special interests. The only losers were the share holders and probably many pension plans.

    I believe the same holds for ratings of Newfoundland. The ratings agencies have a good idea what the rating should be, but it gets tempered, and deals are made to suit more powerful players. I would imagine the Canadian federal government is a player in this case. There may be others too.