Fitch Affirms Tula Region at 'BB'; Outlook Stable

Fri Apr 11, 2014 11:41am EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, April 11 (Fitch) Fitch Ratings has affirmed Russian Tula 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. The region's outstanding RUB8.5bn senior unsecured domestic bonds' ratings (ISINs RU000A0JT1G2, RU000A0JUAC9) were also affirmed at 'BB' and 'AA-(rus)'. KEY RATING DRIVERS The ratings reflect Tula's satisfactory operating performance, moderate albeit increasing direct risk and a well-diversified economy, but also weak debt coverage exceeding its debt maturity profile and the overall modest scale of its economy. Fitch expects Tula's operating balance will be supported by further expansion of the region's tax base and will remain sufficient to cover interest expenses in 2014-2016. In 2013 the operating balance improved to 5.4% of operating revenue from 3% in 2012, due to increase of both taxes and current transfers from the federal budget. However, growth of capex led to the widening of Tula's deficit before debt variation to almost 11% of total revenue in 2013 from 5.4% in 2012. The deficit was fully financed by new debt. Fitch expects Tula's direct risk to remain moderate in the medium-term, in the range of 38%-43% of current revenue between 2014 and 2016. This will represent an increase from 30% in 2013 and 22% in 2012. The growth of direct risk in 2013 exceeded Fitch's expectations due to higher capex stemming from the implementation of the region's gasification programme, and extension of support to businesses investing in the regional economy. Tula's direct risk maturity profile, which stretches to 2017, was shorter than its debt payback ratio of 7.5 years in 2013. Fitch does not see debt payback matching the region's average maturity profile over the medium term, leaving it exposed to refinancing risk. The region is, however, free of contingent liabilities, which is credit-positive. Fitch views the region's immediate refinancing risk as moderate. For 2014 the region faces RUB2bn of maturing domestic bonds, which correspond to 14% of total direct risk. The region will decide later in the year on its refinancing options of issuing another domestic bond if market conditions are favourable or contracting a commercial bank loan. The region is also negotiating with the federal Finance Ministry on contracting subsidised budget loans, which will allow savings on future interest payments. The ratings are weighed down 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 government tiers. The region has a modest but growing economy. The regional economy is diversified and has a well-developed processing industry. Nevertheless, the region's economic profile is still weaker than the national average despite its economic growth outpacing the national average. Tula's GRP increased 3.4% in 2013, exceeding the national growth of 1.3%. The administration expects the regional economy will continue to outperform the national average in 2014. RATING SENSITIVITIES Operating balance improvement close to 10% of operating revenue for two consecutive years accompanied by debt payback being in line with debt maturity will lead to positive rating action. Conversely, inability to maintain stable operating performance with an operating margin above 5% resulting in weak debt payback exceeding 10 years would lead to a downgrade. Contact: Primary Analyst Victoria Semerkhanova Associate Director +7 495 956 99 65 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 99 01 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. 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