Fitch Affirms Krasnodar Region at 'BB+'; Outlook Stable

Mon Dec 9, 2013 11:38am EST

MOSCOW, December 09 (Fitch) Fitch Ratings has affirmed Krasnodar Region's Long-term foreign and local currency ratings at 'BB+', its National Long-term rating at 'AA(rus)' and its Short-term foreign currency rating at 'B'. The Outlooks on the Long-term ratings are Stable. Krasnodar Region's outstanding senior unsecured domestic bonds (ISIN RU000A0JTBA3 and RU000A0JR225) of RUB14bn have also been affirmed at 'BB+' and 'AA(rus)'. KEY RATING DRIVERS Fitch expects Krasnodar Region's direct risk to stabilise at about 40%-46% of current revenue in 2013-2015, after having increased to 47% in 2012 from 30% in 2011. Rapid debt growth was primarily attributed to the Winter Olympic Games, which the region will host in February 2014. Federal budget loans with subsidised interest rates and prolonged maturities comprised 52% of the region's direct risk in 2012. The region's debt portfolio is diversified. Domestic bonds, maturing in 2014-2017, accounted for 22% of 2012 direct risk while commercial bank loans stood at 26%. The region's cash position was strong with RUB22bn cash reserves at end-2012. However, a significant portion of the region's liquidity has been committed to capital projects. Fitch expects the region's sound operating performance to continue in 2013-2015 with an operating margin at about 10%, underpinned by its broad and dynamic tax base. Tax revenue has grown about 20% yoy in 2010-2012. The operating balance is strong and well above the region's debt-servicing liabilities. Krasnodar Region's capex peaked at 40% of total expenditure in 2012, increasing from an average of 25% in 2007-2011. Fitch expects the region to report near-balanced budgets starting in 2014 as major infrastructure projects will be completed by end-2013. Krasnodar Region has a strong and well-diversified economy, which provides a broad tax base and growing tax revenue flows. The region has eight international sea ports with cargo turnover representing about 40% of Russia's total seaport turnover. The region is home to a developed agricultural sector, a wide range of industries, and seaside and ski resorts. RATING SENSITIVITIES Strong budgetary performance with an operating margin at about 20% over the medium-term, coupled with stabilisation of direct risk, would lead to an upgrade. Debt growth leading to a sharp deterioration of direct debt-to-current balance above the average maturity (currently 11 years) of the region's debt would lead to a downgrade. KEY ASSUMPTIONS Russia has an evolving institutional framework with inter-governmental relations between federal, regional and local governments still under development. However, Fitch expects Krasnodar Region will continue to receive a steady flow of earmarked transfers from the federation. The region will continue to have fair access to domestic financial markets to enable it to refinance maturing debt. Krasnodar 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 Konstantin Anglichanov Director +7 495 956 99 94 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 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 on 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 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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