VANCOUVER - A prominent credit-rating agency has downgraded Vancouver's credit status to its lowest level since the firm started assessing the city in 1994.

DBRS said the one notch dip in the city's rating from AA (high) to AA was a direct result of its decision to begin borrowing money to bail out the beleaguered, billion-dollar Olympic Village project.

Downward pressure on Vancouver's new rating could continue for another 12 to 18 months, the agency added.

The city has already coughed up more than $450-million and is currently negotiating with Canadian banks to provide as much as another $400-million or so to finish the development in time for the 2010 Winter Olympics.

Given the increased debt load and uncertainty over how much the city will get back when all market housing units are eventually sold, the agency felt it was no longer prudent to leave Vancouver's rating as it was, DBRS financial analyst Ryan Domsy said yesterday.

"It's not that the city is in dire straits. It's just that its credit profile has suffered a material change," he said, noting that it is unusual for a municipality to involve itself so heavily in real estate.

"That has a risk level that is very different from the risk level of normal municipal operations. You simply don't know what is going to be realized in terms of housing sales. Are you going to be able to get what you expect and cover your costs? It's uncertain."

In general, the lower an institution's credit rating, the higher its cost of borrowing. DBRS has had Vancouver at AA (high) since 2003. Before that, the city had a peak AAA rating.

DBRS is the third credit-rating firm this year to publicly express concern over the city's stake in the village project being built by cash-strapped Millennium Developments.

Both Standard and Poor's and Moody's Investor Services put Vancouver on a credit watch last month , although neither has yet actually downgraded its rating.

A report released yesterday by Moody's predicted that the city's debt will increase to about 120 per cent of operating revenue during the next two years because of financial obligations to the Olympic Village development. Vancouver's normal debt ratios fluctuate between 45 and 55 per cent of operative revenue, according to the report.

David Rubinoff, senior vice-president of international public finance for Moody's Canada Inc., said the trend remains negative for the city's credit rating. "They are taking on a lot more debt."

Vancouver Mayor Gregor Robertson was not too distressed by the DBRS downgrade. The city has anticipated a change since the newly elected council decided to be as transparent as possible about financial troubles down at the village, he said.

Mr. Robertson said it's too early to tell whether the drop will affect interest rates for the city, "but rates right now are very low and, hopefully, this minor adjustment isn't going to cost us a lot."

Regardless, local taxpayers will still be further ahead because of the city's decision this week to buy out a high-interest, $317-million loan from New York lenders Fortress Development, which had been advancing money to the developers, the mayor contended.

City officials have estimated the switch to Canadian banks could save as much as $90-million.