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