Fitch Upgrades Nizhniy Novgorod Region to 'BB'; Outlook Stable

Fri Mar 21, 2014 12:40pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Nizhniy Novgorod Region - Rating Action Report here LONDON/MOSCOW/FRANKFURT, March 21 (Fitch) Fitch Ratings has upgraded the Russian Nizhniy Novgorod Region's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BB' from 'BB-' and affirmed the Short-term foreign currency IDR at 'B'. The National Long-term rating has been upgraded to 'AA-(rus)' from 'A+(rus)'. The Outlooks on the Long-term ratings are Stable. The region's outstanding RUB21bn senior unsecured domestic bonds' ratings (ISINs RU000A0JR2H0, RU000A0JRWA3, RU000A0JSVD7, RU000A0JU3B6) were also upgraded to 'BB' from 'BB-' and 'AA-(rus)' from 'A+(rus)'. KEY RATING DRIVERS The upgrade reflects the following rating drivers and their relative weights: High: Sound Budgetary Performance Fitch expects consolidation of region's operating performance with operating balance around 10%-12% of operating revenue in 2014-2016. This will be supported by further development of region's strong tax base and stable flow of transfers from federal government. In 2013 the operating balance improved to 10% of operating revenue (2012: 8.1%), exceeding Fitch expectations. Fitch believes that the region will narrow the budget deficit in the medium-term, which willcontribute to deceleration of direct risk growth. In 2013 the region posted a deficit at 8.5% of total revenue, down from 10.6% in 2012. Fitch assumes the region will continue to maintain a fairly high level of capex in the medium-term, ahead of the World Football Championship in 2018 of which the region will be the host. The capex will, to a large extent, be covered by the current balance and earmarked capital grants from the federal government. The region's economy is well-developed and diversified. Its GRP is among the top 15 in Russia. The administration expects the economy will continue to expand by an average 4%-5% in the medium term, which will support tax revenue. In 2013 GRP increased by 4.2% yoy, according to regional administration, thus far exceeding the national growth rate of 1.4%. Nizhniy Novgorod Region's ratings also reflect the following rating drivers: Moderate Direct Risk Fitch expects the region's direct risk will remain moderate and will not exceed 60% of current revenue in 2016 (2013: 55%). The region's portfolio is dominated by issued debt with maturity until 2020. However, the debt payback ratio (direct risk to current balance) of 8.1 years in 2013 is higher than its average debt maturity due to the presence of short-term bank loans in the region's debt portfolio. The region would contract short-term bank loans during year-ends to cover a seasonal cash gap arising in December, but would then repay the loans from the beginning of each year ahead of schedule. Little Immediate Refinancing Risk The region faces limited refinancing risk in 2014. Contracted and unutilised credit lines with commercial banks amounted to RUB29bn, which fully cover RUB24.4bn of refinancing needs for 2014. However, for 2014-2016 Nizhniy Novgorod faces refinancing pressure as 80% of its direct risk matures during this period. The region's administration plans to gradually increase the debt maturity profile by further prioritising domestic bonds as a major debt tool. Institutional Constraints The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within the government tiers. RATING SENSITIVITIES Improvement of debt ratios leading to debt coverage matching average debt maturity, accompanied by continued sound operating performance, would lead to an upgrade. Deterioration of operating balance to below 5% of operating revenue, or deterioration of debt coverage ratio to above 10 years, could lead to a downgrade. Contact: Primary Analyst Victoria Semerkhanova Associate Director +7 495 956 9965 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow, 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 7062 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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 and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Additional Disclosure Solicitation Status here ALL 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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