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

Fri Apr 11, 2014 11:38am EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, April 11 (Fitch) Fitch Ratings has affirmed Voronezh Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and affirmed its Short-term foreign currency IDR at 'B'. The National Long-term rating has been also affirmed at 'AA(rus)'. The Outlooks on the Long-term IDRs and National Long-term rating are Stable. Voronezh Region's outstanding RUB10bn senior unsecured domestic bonds ratings (ISIN RU000A0JTG34 and RU000A0JU823) were also affirmed at 'BB+' and 'AA(rus)'. KEY RATING DRIVERS The rating affirmation with Stable Outlook reflects Fitch's expectations that Voronezh region's fiscal performance will stabilise with an operating balance at 7%-8% of operating revenue in 2014-2016 (2013: 6%) that is sufficient to cover interest expenses. The region's deficit before debt variation is likely to slightly roll back to 5%-7% of total revenue in 2014-2015, after it surged to 10.7% in 2013. Voronezh Region's operating expenditure peaked last year, increasing 16% yoy, while its operating revenue increased by 4.6% yoy. Fitch believes that the federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure in the medium term. Fitch expects the region's direct risk to increase to 32% of current revenue in 2014 and to 40% in 2015-2016, from 27.6% in 2013, to fund its expected budget deficit in the medium term. The region's debt remains moderate by international standards, despite its rapid increase to RUB14.2bn in 2013 from RUB6.3bn in 2012. The expected payback ratio (direct risk/current balance) is likely to remain under 5-6 years in 2014-2016, matching average maturity of the region's debt portfolio. The region's cash position was sound at end-2013 with cash reserves totalling RUB4.7bn (2012: RUB4.9bn). Average monthly cash stood at RUB6.9bn at end-2013. As of 1 April 2014 the region had untapped stand-by credit lines of RUB7.5bn, available on a first-demand basis. The region's administration expects moderate GRP growth of 5%-6% yoy in 2014-2016. The local economy slowed down to a 5.6% GRP growth, according to preliminary estimates, in 2013 from double-digit growth in 2011-2012. The region's economy is well diversified by sector, supporting a fairly concentrated tax base. Fitch views the institutional framework in Russia as a weakness for the region's ratings. Because the region has yet to establish a track record of stable development, and also because of frequent changes to the division of expenditure responsibilities between sub-nationals and the federal government, the region's budget-forecasting ability is limited. This in turn affects its planning for long-term development. RATING SENSITIVITIES The ratings could be positively affected by continued sound operating performance with a debt coverage ratio of below four years of current balance and direct risk remaining below 40%-45% of current revenue. A negative rating action could result from a weak operating margin of below 5% for two consecutive years, leading to a significantly weakened direct risk payback ratio that is above the average maturity of the region's debt portfolio. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 9994 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow, 115054 Secondary Analyst Behruz Ismailov Associate Director +7 495 956 9980 Committee Chairperson Guido Bach Senior Director +49 69 76 807 6111 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 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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