Fitch Affirms Russia's Kirov Region at 'BB-'; Outlook Negative

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 Russian Kirov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-', with Negative Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with a Negative Outlook. KEY RATING DRIVERS The ratings reflect the region's weak budgetary performance, rising debt, significant refinancing pressure and a weak economic profile. Positively, they reflect the region's still moderate direct risk compared with international peers and its low contingent liabilities. Fitch expects the region's direct risk to increase in 2014-2016 and to reach 65% of current revenue (2013: 47%). Direct risk is still moderate in an international context, but is fairly high for an emerging-market economy with a lack of access to long-term financing. Fitch expects the region's debt coverage (direct risk/current balance) to be weak in the medium term due to a negative current balance. Given that at end-2013 the region faced repayment of 85% of its direct risk during the next 12 months, Kirov is highly dependent on access to the market for refinancing maturing debt and capex finance. Fitch expects the region's debt structure to improve with a lengthening of its maturity profile. In 1H14 Kirov contracted RUB2bn of three-year bank loans to refinance maturing one-year bank loans. The region's administration plans to replace another RUB3.8bn of bank loans with a three-year subsidised budget loan by end-2014. This will shift the region's debt profile towards medium-term liabilities and reduce immediate refinancing risk; the maturity profile will extend till 2017. Fitch estimates the region's budgetary performance to be weak in the medium term, with an operating balance close to zero and deficit before debt variation of 8-9% of total revenue in 2014-2016. Deficit will be substantially covered by new borrowing due to depletion of accumulated cash reserves, unless Kirov receives additional support from the federal government in the form of transfers or budget loans. The region's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 66% of the national median in 2012. However, the economy is diversified and major taxpayers are spread across various sectors of the economy, which makes the region's tax proceeds less vulnerable to the economic cycles. The administration forecasts annual economic growth to average 2.1% 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 The main factors that could, individually or collectively, lead to downgrade are: - Inability to narrow deficit before debt variation below 5% of total revenue and lengthen the maturity profile of direct risk - A weak operating balance insufficient to cover interest expense for 2014-2015 Positive rating action is unlikely under the Fitch base case scenario. However, additional support from the federal government or significant improvement of operating performance, coupled with an extension of the debt profile, could lead to the Outlook being changed to Stable. Contact: Primary Analyst Elena Ozhegova Associate Director +7 495 956 99 87 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow, 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Guido Bach Senior Director +49 69 76 80 76 111 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 the 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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