S&P affirms Russia's Tomsk Oblast at 'BB'

Wed Dec 12, 2012 12:02pm EST

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Overview
     -- Russia's Tomsk Oblast's budgetary performance will likely be moderate 
in 2012-2013 due to cost-containment measures, and its cash and committed 
facilities cover debt service over the next 12 months, in line with our 
base-case scenario.
     -- The oblast plans to issue an amortizing senior unsecured bond of up to 
Russian ruble (RUB) 5 billion (about $160 million) before the end of this year.
     -- We are affirming our 'BB' long-term rating and 'ruAA' national scale 
rating on Tomsk and assigning a 'BB' issue rating and '3' recovery rating to 
the proposed debt.
     -- The stable outlook reflects our expectation that the oblast will 
deliver a moderate financial performance and continue the existing borrowing 
and liquidity policies.
 
Rating Action 
On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed its 'BB' issuer 
credit rating and 'ruAA' national scale rating on the Russian region Tomsk 
Oblast. The outlook is stable. 

At the same time, we assigned a 'BB' issue rating to the oblast's proposed 
senior unsecured five-year amortizing bond of up to RUB5 billion (about $160 
million), partly to be placed in late 2012. The recovery rating on the 
proposed debt is '3' indicating our expectation of meaningful (50%-70%) 
recovery for bondholders in the event of a payment default.  

Rationale 
The ratings on Tomsk Oblast incorporate our view of its limited financial 
flexibility and predictability, exacerbated by relatively large infrastructure 
needs and the dependence of its revenues on volatile commodity markets. 
Offsetting these factors are our expectation of the oblast's ability to 
deliver moderate budgetary performance and Tomsk's modest debt burden.

Like many other Russian regions, Tomsk Oblast has limited control over its 
revenues, the predominant share of which comprise centrally regulated taxes 
and federal subsidies. Also, the oblast faces high infrastructure needs over 
the long term, further constraining its budgetary flexibility.

Moreover, the oblast's creditworthiness suffers from low predictability of its 
financial indicators. Despite the growth of services, the regional economy 
remains dependent on the oil and gas sector, which accounts for about 25% of 
its gross regional product and 30% of budget revenues. This exposes Tomsk's 
economy to volatility in global commodity markets and limited visibility 
concerning Russia's tax regime for the natural resource extraction sector. The 
oblast, backed by the federal government, strives to foster diversification of 
the local economy by using its developed educational and scientific base. We 
therefore assume that these efforts will only have a visible impact on the 
oblast's tax base in the long term. 

In addition, Tomsk's budgetary performance will be challenged by the federal 
government's recent decision to significantly raise regional public-sector 
salaries. This will subject Tomsk to significant long-term spending pressure 
because the federal government is unlikely to fully compensate it for the 
higher imposed expenditures, which will somewhat undermine the oblast's 
performance after solid financial results in 2010-2011. 

Nevertheless, in our base-case scenario we assume that Tomsk Oblast will be 
able to deliver a moderate budgetary performance in 2013-2015, with operating 
surpluses of 1.5% of operating revenues and deficits after capital accounts of 
2%-2.5% of adjusted total revenues on average. This scenario is based on the 
oblast's positive track record in containing costs, the relatively 
conservative three-year budget proposed by its new governor (zero deficits in 
2014-2015), and continued moderate support from the federal budget. Also in 
case of stress the oblast has the flexibility to postpone certain capital 
expenditures. 

Despite a minor increase, the oblast's low tax-supported debt (which includes 
direct debt and guarantees) is likely to remain below 30% of consolidated 
operating revenues through to 2015. 

Liquidity
We regard the oblast's liquidity as "neutral", as defined in our criteria. In 
accordance with our base-case scenario, the oblast's cash and committed 
facilities will sufficiently cover its debt service within the next 12 months. 
The liquidity position is somewhat mitigated by the oblast's "limited" access 
to external liquidity, due to weaknesses in the Russian capital market and 
banking sector.

This year, some erosion of the financial performance has weakened the oblast's 
cash position, with free cash averaging RUB2 billion compared with more than 
RUB3 billion in 2011. However, the oblast has prudently secured access to 
committed bank facilities. In early December 2012, its two-year to three-year 
committed bank lines totaled RUB5.5 billion, of which more than 70% is 
undrawn. According to our base case, free cash and undrawn facilities should 
still cover Tomsk's debt service needs over the next 12 months.

We assume in our base case that Tomsk will maintain its policy of attracting 
medium- to long-term borrowings. This will likely support a smooth debt 
repayment profile in the medium term and keep debt service below 10% of 
operating revenues. 

The oblast currently has good access to domestic loans. However, Russia's 
capital markets are volatile, and we view access to external liquidity as 
"limited". The weaknesses of the domestic banking sector are reflected in our 
Banking Industry Country Risk Assessment (BICRA), which classifies Russia in 
group '7' on a scale of 1 to 19, with '1' denoting the lowest-risk banking 
industry and '10' is the highest risk (see "BICRA On Russia Revised To Group 
'7' From Group '8'," published on Nov. 9, 2011, on RatingsDirect on the Global 
Credit Portal). 


Recovery analysis
The recovery rating of '3' on the oblast's proposed unsecured debt indicates 
our expectation of 50%-70% recovery in the event of a payment default. For 
more information on our rationale for the recovery rating, see "Recovery 
Ratings Assigned To Debt Of 22 LRGs; Issue Ratings On Those 22 LRGs Affirmed," 
published May 24, 2010. 


Outlook 
The stable outlook reflects our base-case expectation that, despite 
significant salary-related spending pressure triggered by federal decisions, 
the oblast will deliver a moderate performance, backed by cautious spending 
policies and some federal support. The outlook also factors in the 
continuation of the oblast's shift to medium- and long-term borrowings and 
existing management of committed facilities. 

We could lower the rating over the next 12 months if rising spending pressure 
were to lead to a significant weakening of the oblast's budgetary performance, 
resulting in operating deficits in the medium term and higher debt. A change 
in liquidity policies that caused the debt-service coverage ratio to fall 
below 120%, could also be negative for the ratings.

On the other hand, a structurally stronger budgetary performance, with 
operating surpluses consistently exceeding 5% of operating revenues, and cash 
reserves that cover debt service within the next 12 months, as envisaged in 
our upside case, could be positive for the rating. Economic growth that 
translated into higher wealth levels would also be positive for the ratings in 
the longer term.


Related Criteria And Research 
     -- BICRA On Russia Revised To Group '7' From Group '8', Nov. 9, 2011
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010
     -- Recovery Ratings Assigned To Debt Of 22 LRGs; Issue Ratings On Those 
22 LRGs Affirmed, May 24, 2010
     -- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. 
Local And Regional Governments And Related Entities And For Rating Their 
Commercial Paper Programs, Oct. 15, 2009
     -- Assigning Recovery Ratings To International Local And Regional 
Governments' Speculative-Grade Debt, Feb. 3, 2009


Ratings List 

Ratings Affirmed

Tomsk Oblast
 Issuer Credit Rating                   BB/Stable/--       
 Russia National Scale                  ruAA/--/--         
 Senior Unsecured                       BB                 
 Senior Unsecured                       ruAA               
   Recovery Rating                      3                  

New Rating

Tomsk Oblast
 Senior Unsecured                       BB                 
 Senior Unsecured                       ruAA               
   Recovery Rating                      3                  

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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