Fitch Affirms Kirov Region at 'BB-'; Outlook Stable
16 Dec 2016 12:06 PM
Fitch Ratings-Moscow/London-16 December 2016: Fitch Ratings has affirmed Russian Kirov Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', National Long-Term Rating at 'A+(rus)' and Short-Term Foreign Currency IDR at 'B'. The Outlooks on the Long-Term ratings are Stable.
The affirmation reflects unchanged Fitch's base case scenario regarding the region's stabilised operating performance and moderate direct risk growth over the medium term.
KEY RATING DRIVERS
The 'BB-' rating reflects Kirov's low operating balance, our expectation of a narrowing budget deficit and high direct risk with material proportion of low-cost budget loans. The ratings also consider the region's modest economic indicators and weak institutional framework for Russian sub-nationals.
Fitch projects Kirov's operating balance will remain at 2%-3% of operating revenue over the medium term (2015: 2.7%). However, this should be sufficient to cover reduced interest payments. We also forecast Kirov will narrow deficit before debt variation to 5%-7% of total revenue in 2016-2018 from an average 10% in 2013-2015 driven by requirements imposed by the Ministry of Finance as a condition for granting budget loans to the region.
Fitch considers that the region's fiscal flexibility remains low. Its tax raising ability is limited by the modest size of the tax base and low degree of autonomy in setting tax rates. More than 65% of Kirov's tax revenue is personal and corporate income taxes, which are slowing down amid a deteriorated economic environment in Russia. Most expenditure is social-oriented and hence quite rigid, while capital expenditure has already been cut towards 10% of total expenditure, leading to low expenditure flexibility.
In 10M16, the region's performance was in line with our expectation. Kirov has collected 79% of full-year budgeted revenue and incurred 77% of expenditure. This resulted in an intra-year deficit of RUB1.3bn and Fitch forecasts a full-year deficit of RUB3.1bn in 2016. Direct risk was RUB26bn at end-October 2016, moderately up from RUB23.6bn at end-2015.
Fitch projects Kirov's direct risk will reach 70% of current revenue by end-2018 (2015: 59%) due to an expected continuous budget deficit. Direct debt will likely remain moderate at below 40% of current revenue (2015: 18%) as we expect the region will continue to benefit from ongoing state support in the form of low-cost budget loans. We project the proportion of budget loans will remain high at about 55% of the direct risk in 2016-2018.
Like most Russian regions, Kirov's refinancing risk stems from its reliance on one- to three-year bank loans. At 1 December 2016, the region's debt repayment schedule was concentrated in 2017-2018, when more than 90% of direct risk is due, including RUB15bn bank loans and RUB8.6bn budget loans. Fitch expects the region will roll-over its maturing budget loans while remaining funding needs will be covered by bank loans. We consider Kirov will have reasonable access to capital markets over the medium term.
Kirov has a diversified but modest economy. Its gross regional product (GRP) per capita was 66% of the national median in 2014. The major taxpayers are spread across various sectors of the economy and the largest 10 of them contributed less than 20% of Kirov's tax revenue in 2014. Based on the region's estimates, GRP contracted 4% in 2015 (2014: grew 2.2%), in line with the national economic trend. The regional administration expects the local economy to stagnate or grow only 1% per year in 2016-2018.
Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hamper the forecasting ability of local and regional governments in Russia.
An improvement in the operating margin towards 10%, coupled with a debt payback ratio (direct risk to current balance) of around 10 years on a sustained basis, could lead to an upgrade.
The inability to maintain a positive operating margin on a sustained basis or an increase in direct risk above 80% of current revenue could lead to a downgrade.
+7 495 956 2406
Fitch Ratings CIS Ltd
26 Valovaya Street
+7 495 956 2405
+49 69 768076 111
Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: firstname.lastname@example.org; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: email@example.com.
Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analyses purposes. For Kirov region these adjustments include:
- Transfers received of capital nature were re-classified from operating revenue to capital revenue.
- Transfers made of capital nature were re-classified from operating expenditure to capital expenditure.
- Goods and services of capital nature were re-classified from operating expenditure to capital expenditure.
Additional information is available at www.fitchratings.com.
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001