Fitch Affirms Kemerovo Region at 'BB'; Outlook Stable

Mon Nov 18, 2013 11:32am EST

MOSCOW/MILAN/LONDON, November 18 (Fitch) Fitch Ratings has affirmed Kemerovo 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 'AA-(rus)' with Stable Outlook. KEY RATING DRIVERS The ratings factor in substantial deficit before debt variation in 2012-2013 caused by deterioration in the region's operating revenue, its high capex, and foreign-currency exposure stemming from a long-term bank loan. The Stable Outlook reflects Fitch's expectation of Kemerovo's satisfactory operating performance and moderate direct risk for 2013-2015. Fitch expects the region's operating margin to stabilise at about 6% during 2013-2015, up slightly from a low 4.5% in 2012 (2011: 7.5%). The operating balance deteriorated in 2012 as operating revenue declined mostly due to a significant drop in corporate income tax. The CIT reduction was due to weak results at major local taxpayers and the introduction of new CIT regulation by the national government. The administration only managed to cut operating expenditure by 6.7%, which was not sufficient to compensate an almost 10% drop in operating revenue in 2012. Fitch expects Kemerovo's direct risk will remain moderate at below 45% of current revenue during 2013-2015. High deficit before debt variation during 2012 and so far in 2013 have resulted in rapid rise of absolute debt, leading Fitch to expect an increase in direct risk to RUB34.9bn at end-2013 from RUB19bn at the beginning of 2012. The region relies on bank and federal budget loans with three-to five-year maturity. Of its debt, 66% matures during 2014-2016 - which is typical of Russian regions - exposing the region to some refinancing pressure. The region is exposed to unhedged foreign-currency risk because 22% of its direct risk (USD230m) was denominated in USD as of 1 October 2013. It is represented by liabilities to Vnesheconombank (BBB/Stable/F3) that were assumed by the region in the mid-2000s. Annual interest rate for the outstanding debt is only 1% and the maturity profile is smoothed out to 1 January 2035, which helps take the pressure off the debt servicing burden. Kemerovo has low contingent risk stemming from public sector entities' financial debt and issued guarantees. In late 2011, the region imposed a moratorium on new guarantees issuance and as of 1 November 2013 the region had no outstanding guarantees. The region has a strong economy dominated by the coal and metal industries. This provides an extensive tax base for the region's budget, allowing the region to rely on its own budget revenue rather than on transfers from the federal budget. However, a large portion of tax revenues depends on companies' profits, resulting in high revenue volatility. This is evident in a decline of tax proceeds when market conditions for coal and steel turn unfavourable. RATING SENSITIVITIES Improvement of operating balance to an average 12% of operating revenue for two years in a row and a debt coverage ratio (currently 4.7 years) in line with the average debt maturity (currently about 3 years) would lead to an upgrade. Direct risk growth above 50% of operating revenue accompanied by persistently weak budgetary performance with an operating margin below 5% would lead to a downgrade. KEY ASSUMPTIONS - Russia has an evolving institutional framework with a system of inter-governmental relations between federal, regional and local governments still under development. However, Fitch expects Kemerovo will continue to receive a steady flow of earmarked transfers from the federation - Kemerovo Region will continue to have fair access to domestic financial markets to enable it to refinance maturing debt - Kemerovo Region will continue to benefit from the revenue inflow underpinned by a strong industrial base and natural resource endowment. The local economy will continue to demonstrate modest economic growth Contact: Primary Analyst Vladimir Redkin Director +7 495 956 70 64 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Elena Ozhegova Associate Director +7 495 956 99 87 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 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. 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