Fitch Revises Republic of Komi's Outlook to Negative; Affirms at 'BB+'

Fri Apr 25, 2014 11:42am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Republic of Komi - Rating Action Report here MOSCOW, April 25 (Fitch) Fitch Ratings has revised Russian Republic of Komi's Outlook to Negative from Stable. The agency has affirmed the republic's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', National Long-Term rating at 'AA(rus)' and Short-term foreign currency IDR at 'B'. The republic's outstanding senior unsecured domestic bonds of RUB4.2bn (ISIN RU000A0JS0N1, RU000A0JR3B1 and RU000A0GKKB7) have been affirmed at Long-term local currency 'BB+' and National Long-term 'AA(rus)'. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: High: Komi's budgetary performance deteriorated in 2013 to sharply below historical levels. The operating balance turned to a negative 7% of operating revenue compared with an average operating surplus of 12% for 2008-2012. Overall deficit widened to an unsustainable 24% of total revenue, leading to a depletion of the republic's historically high liquidity and almost a doubling of debt. The weak operating performance was due to a sharp fall in corporate income tax (CIT) and the federal government's order to align public sector salaries with Komi's fairly high average salary. Fitch expects CIT to resume growth in 2014, following completion of accelerated depreciation charges utilised by consolidated taxpayer groups in 2013. However, the federal government's election pledges will continue to fuel expenditure. The net result will be weak budgetary performance in 2014-2016, with operating surpluses insufficient for debt service and continued overall deficits leading to growth of indebtedness. Komi's creditworthiness remains constrained by the institutional framework for local and regional governments (LRGs) in Russia. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between the tiers of government. Medium: Komi's direct risk increased to 37% of current revenue at end-2013 from 21% a year earlier. The republic's indebtedness is still moderate compared with international peers. However, pressure on operating expenditure will lead to continued growth of debt. Fitch forecasts that the republic's direct risk will exceed 50% of current revenue by 2016, while debt coverage will remain unsustainable in the medium term. The republic depleted its historically strong cash reserves during 2013. Liquidity dropped to RUB1.7bn as of 1 March 2014 from RUB5.5bn at end-2012. Komi has low refinancing risk in 2014 at RUB3bn but faces a refinancing peak of RUB11bn in 2015. However, Fitch does not expect Komi to face difficulties in accessing debt markets or rolling over existing loans with Sberbank of Russia (BBB/Negative). The Republic of Komi's ratings also reflect the following key rating drivers: Komi has a strong economy with wealth indicators significantly above the national median. The republic's gross regional product per capita (GRP) in 2012 exceeded the national median by more than 2x while average salary in December 2013 exceeded the national median by more than 50%. Fitch expects Komi's GRP to expand at about 2% annually in 2014-2016. The strong economy is, however, weighted towards the natural resources sector, leading to high tax concentration. The top two taxpayers - OAO LukOil (BBB/Negative) and OAO Gazprom (BBB/Negative) - together contributed 25% of total tax revenue in 2013. Harsh climate and the republic's remote location from major markets hinder investments in industries outside natural resources. RATING SENSITIVITIES Growth of direct risk to above 50% of current revenue, coupled with consistently weak budgetary performance resulting in operating balances insufficient for debt service and a reduced capacity to obtain affordable funding for its debt refinancing needs, will lead to a downgrade. Contact: Primary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 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', dated 23 April 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Effective from 9 April 2013 – 23 April 2014 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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