Fitch Affirms Smolensk Region at 'B+'; Outlook Negative

Fri Feb 21, 2014 11:35am EST

MOSCOW, February 21 (Fitch) Fitch Ratings has affirmed Smolensk Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A-(rus)'. The Outlook is Negative. Fitch has also assigned Smolensk's outstanding senior unsecured domestic bonds (ISIN RU000A0JU6N4) of RUB3bn a Long-term local currency rating of 'B+' and a National Long-term rating of 'A-(rus)'. KEY RATING DRIVERS The ratings reflect the region's rapidly rising debt, which increased 39% in 2013 to about RUB20bn. This was equivalent to 73% of its current revenue. The region's deficit widened to an exceptional 24.7% of total revenue in 2013 from 5.2% in 2012. This was due to lower-than-expected tax proceeds and high expenditure linked to infrastructure modernisation ahead of the 1,150th anniversary of the region's capital, the City of Smolensk. Capex postponed from the previous year also contributed to the worsened budget deficit. Fitch expects the region's deficit to narrow to 8.3% of total revenue in 2014 due to capex cuts and higher tax revenues. This would lead to a slowdown of debt growth and Fitch expects the region's direct risk to not exceed 80% of current revenue between 2014 and 2016. Smolensk has low immediate refinancing risk with only 2.6% of total direct risk maturing in 2014. The region's administration improved its debt profile in 2013 by increasing the share of long-term liabilities. The region contracted a RUB7bn loan from the federal budget with a three-year maturity and issued RUB3bn five-year amortising bonds in 4Q13. This has extended the direct debt maturity profile till 2018. However, the region faces significant refinancing in 2015 and 2016, with 87% or RUB17.5bn of direct risk maturing during this period. Fitch does not expect the region to face difficulties in refinancing, although a weak current balance leaves the region dependent on access to capital markets for refinancing and capex funding in the medium term. Fitch expects the region's operating performance to remain weak in 2014-2016, with a positive, but close to zero, operating balance. According to preliminary data the operating balance turned positive at 0.8% of operating revenue in 2013 (negative 1% in 2012), but the current balance remained in deficit. Historically, the region has suffered from weak budgetary performance with a negative operating balance between 2007 and 2012. The region has a weak tax capacity, with federal transfers constituting a significant proportion of total revenue (about 38% in 2012). It receives transfers for operating and investment spending, which are, to a large extent, earmarked for specific purposes. During 2012-2013 current transfers represented on average 25% of current revenue, while capital transfers covered 49% of capex. However, federal transfers provide some stability during recession, making the region less vulnerable to negative external shocks. RATING SENSITIVITIES The region's high direct risk at above 70% of current revenue, accompanied by an inability to maintain a positive operating balance would lead to a downgrade. Contact: Primary Analyst Vladimir Redkin Director +7 495 956 70 62 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 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 on www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', 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.