Lower B.C. outlook raises regional risk

Investors’ love affair with the debt of Canada’s resource-rich Western provinces is being tested after Moody’s Investors Service cut its outlook on British Columbia’s credit rating.

The difference between the 10-year benchmark yields of British Columbia and Quebec, rated two steps lower, narrowed this week to 23 basis points, the tightest spread since October, according to data compiled by Bloomberg. The spread was as wide as 33 basis points in August. Moody’s cut its outlook on British Columbia, one of two rated AAA, to “negative” from “stable” on Dec. 12, citing a rising debt burden in a weakening economy.

Provinces with commoditylinked economies are suffering from weakness in a range of resource exports from natural gas to metallurgical coal and potash. Prime Minister Stephen Harper said Dec. 7 that Canada, which sits atop the world’s third-largest pool of crude reserves, won’t approve foreign state-owned companies taking controlling interests in oilsands projects barring exceptional circumstances, limiting the scope for future investment.

“The theme of lower revenues and higher debt burdens resulting from modest growth and lower commodity prices, we expect, will be a constant throughout 2013 for Canadian provinces,” Aubrey Basdeo, head of Canadian fixed income at Blackrock Inc., said Friday by email. This year’s popular trading strategy of moving holdings out of Quebec and Ontario and into the commodity-rich provinces of British Columbia and Alberta “is finished in the short-run,” he said.

The cut is rekindling concern about the sustainability of an oil boom in Alberta, the only other province with top ratings.

“Alberta is starting from a much better position so the concern is not as acute,” Brian Calder, a Calgarybased bond trader at Bissett Investment Management, which oversees about $4 billion of fixed-income assets at Franklin Templeton Investment Funds. “That said, Alberta is very resource-dependent so those concerns certainly bear monitoring.”