Fitch Affirms Russian Kostroma Region at 'B+'; Outlook Stable

Fri Aug 8, 2014 12:04pm EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, August 08 (Fitch) Fitch Ratings has affirmed Russia's Kostroma Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', National Long-term rating at 'A(rus)' and its Short-term foreign currency IDR at 'B'. The Outlooks on the Long-term IDRs and National Rating are Stable. Kostroma region's outstanding senior unsecured domestic bonds have also been affirmed at 'B+' and 'A(rus)'. KEY RATING DRIVERS The ratings reflect Kostroma's material direct risk with considerable refinancing needs concentrated in 2H14 and its weak socio-economic profile. The Stable Outlook reflects Fitch's expectation that the region's operating balance will, however, remain sufficient to cover interest payments during 2014-2016. Fitch expects the region's direct risk to continue rising and to reach 80% of current revenue by end-2016. Kostroma reported a deficit of 10.5% of total revenue in 2013, compared with a surplus of 0.4% in 2012. This fuelled a 21% increase in the region's direct risk to RUB11.7bn or 67% of current revenue at end-2013. Fitch expects the region's deficit will narrow by 2016 but still represent 6%-8% of total revenue. A large part of Kostroma's debt is short-term, with 42% of total direct risk maturing in 2H14 and a further 28% of outstanding debt during 2015. Fitch expects the region's current balance for 2014 to be close to zero, and therefore more capital market funding to be raised. Refinancing risk is partly mitigated by budget loans from the central government till end-2014, although the loan amounts have yet to be confirmed. Kostroma will also likely receive additional grants from the state in 2H14. The administration has sought - and intends to continue - to lengthen its debt maturity profile; at end-2013 it contracted a RUB1,475m loan from the federal budget with a three-year maturity and issued RUB3bn five-year domestic bonds. These transactions extend the region's direct risk maturity profile till 2018 and help to postpone refinancing. Lower-than-expected operating revenue and higher operating expenses, resulting from a national government decision to increase public sector salaries, led to a deterioration in the operating balance to 7.5% of operating revenue in 2013 from 12.7% in 2012. Fitch expects a close to zero current balance in 2014 (2013: 3.7% of current revenue) with an operating margin of 4.7%. The region will continue to suffer from increased expenditure responsibilities not fully covered by revenue growth. However, if additional financial support from the federal budget is provided, that would improve the region's operating performance, limit debt increase and have a positive impact on ratings. Kostroma's tax base is historically modest, limiting its self-financing capacity. It is, however, supplemented by steady financial aid from the federal government. Federal current transfers averaged 31% of the region's operating revenue in 2012 and 2013, helping to improve its budgetary performance. Fitch expects Kostroma to receive federal transfers in the range of 28%-30% of operating revenue in 2014-2016. Over the last four years the region's economy has outperformed the national average. Despite higher economic growth Kostroma's socio-economic profile remains weaker than the average Russian region. The region's per capita gross regional product was 82% of the national median in 2012. RATING SENSITIVITIES The ratings may be upgraded if the region records an operating balance at 5% of operating revenue on a sustained base, accompanied by direct risk stabilising at below 70% of current revenue and by declining reliance on short-term bank loans. Further growth of the region's total indebtedness above 80% of current revenue, accompanied by persistent refinancing pressure and a negative operating balance, 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 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 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 - Outside the United States 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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