Fitch Affirms Ulyanovsk Region at 'BB-'; Outlook Stable

Tue Oct 1, 2013 11:39am EDT

LONDON/MOSCOW, October 01 (Fitch) Fitch Ratings has affirmed Ulyanovsk Region's Long-term foreign and local currency ratings at 'BB-', with Stable Outlooks, and its Short-term foreign currency rating at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with Stable Outlook. KEY RATING DRIVERS The affirmation reflects Fitch's expectation of moderate recovery of Ulyanovsk's budgetary performance in 2014-2015, still modest, albeit increasing direct risk, and low immediate refinancing risk. However, the ratings also factor in pressure on operating expenditure, which resulted in a negative operating balance in 2012 and a continued budget deficit in the past three years. Fitch forecasts that the region will record a slight improvement in its operating performance after a sharp deterioration in 2012 caused by an increase in operating expenditure and unexpected reduction of current transfers from the Russian Federation. Fitch expects the operating balance will turn positive in 2013 but will remain weak at 0.5%-1% of operating revenue (2012: -0.6%). Fitch expects the region's operating margin to consolidate at about 3%-4% during 2014-2015. Fitch expects Ulyanovsk's direct risk to be at a moderate 36% of current revenue during 2014-2016. The region recorded a deficit before debt variation during the past three years, which peaked at 12.4% of total revenue in 2012. Fitch expects the deficit to narrow but to a still high 9% in 2013. As a result, the region's direct risk will reach RUB12bn in 2013, up 36% on 2012. Debt coverage (direct risk/current balance) will remain weak in the medium term due to a low operating balance. The immediate refinancing risk of the region is low. Ulyanovsk has contracted a RUB2.9bn unused credit line with local banks, which will cover its RUB500m maturing debt till the year-end and its forecasted budget deficit in 2013. However, refinancing pressure exists over the medium term. The region mostly relies on bank loans with a three-year maturity and has to pay back RUB7.3bn of maturing bank loans and budget loans during 2014-2015, which is equivalent to 72% of total risk as of end-Q313. Nevertheless, the agency expects the region to roll over these loans with the banks. The region has no outstanding guarantees, and therefore its contingent liabilities are limited to the modest indebtedness of its public sector enterprises (PSEs). The financial debt of the region's PSEs was a modest RUB840m at end-2012 and the region has not had to cover the obligations of its PSEs so far. The region's economy is modest in size and per capita gross regional product was 20% lower than the national median in 2011. This has resulted in a low self-financing capacity for capital outlays and a dependence on federal capital grants for capex financing. Capital grants from the Russian Federation averaged a high 60% of the region's capital spending during 2010-2012. RATING SENSITIVITIES An improvement of the region's operating balance to about 10% of operating revenue leading to maintenance of stable debt coverage at below eight years could lead to an upgrade. Inability to restore operating margin to 3%-4%, coupled with a direct risk growth above 50% of current revenue, would lead to a downgrade. KEY ASSUMPTIONS - Russia has an evolving institutional framework with a system of intergovernmental relations between federal, regional and local governments still under development. However, Fitch expects Ulyanovsk will continue to receive a steady flow of transfers from the federation - Russia's economy will continue to demonstrate modest economic growth. Fitch does not expect dramatic external macroeconomic shocks - The federal government's budgetary performance will remain sound, which will support the Ulyanovsk region - Ulyanovsk Region will continue to have fair access to domestic financial markets to enable it refinance maturing debt Contact: Primary Analyst Vladimir Redkin Director +7 495 956 70 64 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Analyst +7 495 956 99 65 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 908 7203 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside United States', dated 9 April 2013, are available on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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