Fitch Affirms Russia's City of Kazan at 'BB-'; Outlook Stable

Fri Jul 25, 2014 4:23pm EDT

(The following statement was released by the rating agency) MOSCOW/MILAN/LONDON, July 25 (Fitch) Fitch Ratings has affirmed Russia's Kazan City'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 city's National Long-term rating at 'A+(rus)' with Stable Outlook. The city's outstanding RUB0.6bn senior unsecured domestic bonds' ratings have also been affirmed at 'BB-' and 'A+(rus)'. KEY RATING DRIVERS The ratings reflect high direct risk - which includes sub-loans from federal government - mitigated by favourable repayment terms. The ratings also take into account satisfactory operating performance, moderate direct debt (bank loans and domestic bonds) and a strong diversified economy. Operating performance in 2013 was lower than Fitch had expected based on preliminary results provided by the city. The operating balance accounted for 5% of operating revenue, lower than preliminary indications of 11% as transfers from Tatarstan Republic fell short of projections. Fitch believes that pressure on opex will ease in 2014 after the central government's objective to align teachers' salaries with the average regional salary was achieved in 2013. Nevertheless as the economy slows Fitch has revised its forecast for the operating balance in 2014-2016 to 5%-7% of operating revenue from 10%, which is still in line with 'BB-' rating. Fitch expects the city's capex will decline to average 15% of total spending in 2014-2016 from a high of almost 30% in 2011-2013. High capex was driven by modernisation of the city's engineering and transport infrastructure and by construction of new social and sport facilities for Universiade-2013. Low capex needs in the medium term will limit the city's debt needs. Fitch expects the city's direct debt (issued debt and bank loans) will remain moderate, at below 30% of current revenue in 2014-2016. Kazan's direct debt declined to 25% of current revenue in 2013 (2012: 28.1%). During 1H14 the city had further reduced direct debt to RUB4.1bn from RUB4.8bn at the beginning of the year. Refinancing pressure will persist in 2014 as Kazan faces a RUB3.5bn repayment of short-term bank loans and a RUB0.6bn maturing bond. However, refinancing pressure is mitigated by the moderate amount of direct debt and the city's long and successful track record of relationships with commercial banks. Kazan plans to refinance maturing obligations with three-year bank loans, which will extend and smooth the city's debt maturity profile. Kazan's direct risk, which includes budget loans, remains high and accounted for 160% of current revenue in 2013. The bulk of direst risk relates to RUB25.4bn sub-loans from the federal government, which were earmarked for infrastructure development in preparation for the Universiade 2013. In mid-2013, the terms of budget loan repayment were significantly relaxed, with the introduction of a grace period until 2023 and the principal to be amortised in 10 annual instalments from 2023 to 2032. Kazan is the capital of Tatarstan (BBB/Negative/F3), one of the most developed Russian regions. The city received large capital transfers from the republic in the mid-2000s to finance its capex. This has remained high during the past five years and Fitch expects the republic to be supportive in future, if necessary. The city's economy is well-diversified and has a developed industrial sector. The latter is dominated by petrochemicals, machine-building and food processing. In 2012-2013 the city's economy grew at a more rapid pace than the national economy. The administration expects average growth will be 2%-3% annually in 2014-2016. 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 between the tiers of government. RATING SENSITIVITIES An increase of direct debt to above 50% of current revenue, and/or further deterioration of operating balance to below 5% of operating revenue could lead to a downgrade. A decline of direct risk to below 100% of current revenue accompanied by sound operating performance in line with its 2013 performance, could lead to an upgrade. 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 9901 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 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 23 April 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: International Local and Regional Governments Rating Criteria - Outside the United States here Tax-Supported 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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