Fitch Affirms Kaluga Region at 'BB'; Outlook Stable

Fri Apr 11, 2014 11:42am EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, April 11 (Fitch) Fitch Ratings has affirmed Kaluga Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with Stable Outlook. Kaluga's outstanding senior unsecured domestic bonds (ISIN RU000A0JRHN7) of RUB2.5bn have also been affirmed at 'BB' and 'AA-(rus)'. KEY RATING DRIVERS The affirmation reflects the administration's efficient and proactive management, the region's rapid economic development and sound budgetary performance. The ratings also factor in increasing pressure on operating expenditure and a growing debt burden, including contingent risk stemming from the liabilities of public sector entities (PSEs), although the maturity profile of these liabilities is long-term. Fitch expects Kaluga's direct risk, including the liabilities of the Development Corporation of Kaluga Region (DCKR), to increase by a considerable 17% to RUB28bn in 2014, fuelled by a forecast deficit of RUB3.7bn. This would correspond to 73% of expected full-year current revenue, up from 70.3% in 2013. The agency had previously expected direct risk to be lower at 63% of current revenue in 2014 but deceleration of tax revenue growth has led to an increase of the debt burden. The region's direct market debt tripled since 2009 to RUB12bn by end-2013. In Fitch's view further rapid market debt rise would erode the region's creditworthiness. However, expected rapid growth of operating revenue should allow the overall debt burden to peak at 75% in 2015, before easing to 71% in 2016. Direct debt coverage (direct debt to current balance) would also weaken to 7 to 8 years in 2014-2016 from 5.5 years in 2013 but remain in line with the current ratings. Fitch expects Kaluga to continue to demonstrate solid operating performance, supported by further expansion of its tax base. The agency expects full-year operating balance to stabilise at about 10%-12% of operating revenue in 2014-2016, in line with the 11% reported in 2013. This is down slightly from an average of 15.4% during 2010-2012, due to increasing operating expenditure pressure and decline in corporate income tax (CIT) proceeds in 2013. Opex will remain under pressure as a result of national government decisions to increase public sector salaries and reduce transfers from the federal budget. However, the administration expects CIT to recover on growing industrial output. The regional administration is focussed on local economic development and on expanding the tax base. Kaluga has been successful in attracting foreign investments, promoting industrial production and innovation. These policies have allowed the local economy to grow at a cumulative 32.8% in 2010-2012, well above the 12.7% average for the Russian Federation. The region actively uses PSEs to finance local investment projects. It established DCKR, which at end-2013 borrowed RUB6.8bn to finance the development of regional industrial zones. Two other regional public companies incurred a combined RUB1bn debt at end-2013 to finance various investment projects. The region provides subsidies to cover the principal and interest on the debt of these PSEs. Consequently, Fitch considers the liabilities of those PSEs as the region's direct risk. RATING SENSITIVITIES A continuous sound operating performance with operating margins of 12%-14%, underpinned by economic growth, and maintaining direct debt coverage (end-2013: 5.5 years) in line with the region's average debt maturity, would lead to an upgrade. Continuous deficit before debt variation leading to direct risk increasing above 75% of current revenue and deterioration in direct debt coverage beyond 10 years would lead to a downgrade. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956 99 01 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Associate Director +7 495 956 99 65 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 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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