Lower government support hits CWB credit rating

Standard and Poor’s Rating Services announced that it has lowered its long-term issuer credit rating on the Canadian Wheat Board to ‘AA’ from ‘AA+’, citing a lower level of federal government support for the CWB as the main reason. Standard and Poor’s affirmed its other rating on the CWB at the same time and said the outlook is stable.

“We don’t expect this to have an effect; however, it is too early to assess what the impact will be or whether there will even be an impact on business as a result of this,” said John Lyons, a spokesman for the CWB.

In a press release issued Friday, Standard and Poor’s credit analyst Stephen Ogilvie said, “The ratings on the CWB depend on its public policy role as the sole marketer of Western Canadian grain for export and the federal government’s support in that role.”

Whereas support from the federal government has historically been high, as evidenced by the government guarantees provided on CWB’s receivables, borrowings, and payments to producers among other things, that support has fallen since 2006 as the Conservative government has sought to implement “market-oriented reform of the CWB,” Ogilvie explained.

“Given the commitment of the government to market-oriented reform and the current strained relations between the government and CWB’s board, we don’t expect that the level of federal government support for CWB’s public policy role will recover in the near term,” he said.

Ogilvie noted however, that further material deterioration in relations is unlikely in the near-term seeing as how the government’s efforts to implement market-oriented reforms at the CWB will depend on a number of factors outside of government control.

“In the medium term, the ratings trajectory will turn on the outcome of a possible federal election; farmers’ support for its monopoly position; and on any changes to the board’s commercial strategy, corporate structure, and operational profile. These would include the level of capital CWB can raise and the expected timeframe for withdrawing one or more government guarantees,” Ogilvie said.

Meanwhile, Standard and Poor’s stable outlook reflects expectation that relations between the CWB and the government will not materially deteriorate further, he said.

However, “a change in the business model, especially with respect to changes in government support, could dramatically affect the board’s credit profile.

“If federal guarantees were removed and the single-desk monopoly eliminated (or phased out), its credit profile and rating would most likely come to resemble that of private-sector companies that have made such a transition, such as the Australian Wheat Board (BBB-/Negative/–).

“A substantial and sustained improvement in the government’s support for CWB’s policy role as a single-desk marketer would be necessary for an upgrade,” Ogilvie concluded.

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