Seven hectares of the 32-hectare Southeast False Creek development site will be transformed into the Olympic Village during the 2010 Winter Games. (CBC)

The debt rating service DBRS has downgraded the City of Vancouver's credit rating by one notch from AA (high) to AA, and says the outlook remains negative because of the financial sinkhole at the Olympic Village.

"The rating action is the result of the recent announcement by the city that it has started drawing on a credit facility recently set up to address the financial problems of the Vancouver Olympic Village, which is expected to boost debt substantially, along with significant uncertainty regarding the financial outcome of the project," the Toronto-based rating agency said in statement released Friday.

DBRS had placed Vancouver's rating under review in mid-January after the municipal government said it would undertake borrowing for the 1,100-unit False Creek project as the lender had stopped advancing funds in September because of cost overruns.

The village, after housing athletes for the 2010 Winter Games, is to be converted into 850 market-priced homes and 250 units of social housing.

DBRS noted that the construction budget, originally $750 million, is estimated to have risen by $125 million.

Following a legislature vote granting the city unlimited authority to borrow for the village, Vancouver announced Thursday it was arranging a $400-million revolving line of credit.

Of this, $90 million has been used to buy out the original lender along with $240 million from municipal reserves. The city has also advanced $134 million to the developer since September.

Its $464-million investment to date leaves more than $400 million needed to finish the project by the November deadline.

"As a result, tax-supported debt is expected to grow well beyond $2,000 per capita by the end of 2009 ... a level not consistent with a AA (high) rating," DBRS said.

"Furthermore, the sizable payments made from the reserves have significantly depleted the working capital and considerably reduced the financial flexibility of the city."

DBRS also noted "considerable uncertainty" about possible further deterioration of the project and how much will eventually be realized from selling the housing units.

"As a result, the downward pressure on the city's rating is expected to remain high over the next 12 to 18 months."