April 25, 2014 / 3:41 PM / 4 years ago

Fitch Affirms Russia's Chelyabinsk Region at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/MOSCOW/LONDON, April 25 (Fitch) Fitch Ratings has affirmed Russian Chelyabinsk Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term ratings are Stable. The agency also affirmed OJSC Southern Urals Civil Construction and Mortgage Corporation's (ISIN RU000A0JTGC8) RUB2.5bn outstanding senior unsecured domestic bonds at Long-term local currency 'BBB-' and National Long-term 'AA+(rus)'. The bonds are guaranteed by Chelyabinsk Region, which is the sole shareholder of the company. KEY RATING DRIVERS The ratings reflect Chelyabinsk Region's low debt and strong economy. However, the ratings also take into account its high contingent liabilities, growing debt and deteriorating budgetary performance. The Stable Outlook reflects Fitch's view that, despite high pressure on expenditure and a nationwide economic slowdown, the region will sustain its current level of creditworthiness through the economic cycle. Fitch expects Chelyabinsk Region's direct risk to remain low at under 25% of current revenue and its debt ratios to remain strong in 2014-2016. Direct risk rose to RUB12bn or 12% of current revenue at end-2013, from 5% a year earlier. Debt coverage by current balance remained strong at less than two years at end-2013. Interest paid accounted for less than 1% of operating revenue in 2013. Chelyabinsk Region has issued guarantees of RUB3.3bn in favour of OJSC Southern Urals Civil Construction and Mortgage Corporation's bond. After a period of sharp growth the total amount of outstanding guarantees issued by the region stabilised at about RUB12bn at end-2013. However, net overall risk increased to 22% of current revenue at end-2013, from 10% a year earlier. So far no guarantees have been called by lenders, but further growth of contingent risk will put pressure on the region's creditworthiness. The region historically has had high cash reserves, which were partly depleted at end-2013 to RUB3bn (end-2012: RUB7bn). However, the region has no maturing debt in 2014 and faces only a maturing budget loan of RUB0.5bn in 2015. Its refinancing peak is in 2016 at RUB10.2bn but Fitch does not expect the region to face any difficulties in accessing debt markets or rolling over its existing loans with Sberbank of Russia (BBB/Negative/F3). Fitch expects the region's budgetary performance to remain at satisfactory, but below historical levels. Operating surpluses are likely to be at 5%-6% of operating revenue in 2014-2016 (2013: 7.3%). The federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure in the medium term, while revenue growth will not return to pre-2012 levels due to the economic slowdown. As a result the region may cut capital expenditure to below 20% of total expenditure due to declining budgetary spending flexibility. Chelyabinsk Region has a sound industrial economy, which supports wealth indicators above the national median. The region is home to well-developed metallurgical and machine-building industries. The tax base is slightly concentrated with the 10 largest taxpayers accounting for about 20% of tax revenue per year in 2012 and 2013. RATING SENSITIVITIES Improvement of budgetary performance with operating surpluses consistently at above 10% of operating revenue, coupled with maintenance of net overall risk at about 20% of current revenue, would lead to an upgrade. Sharp growth of total indebtedness to above 50% of current revenue or weak operating surpluses at below 5% of operating revenue leading to fragile debt ratios would 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 Guido Bach Senior Director +49 69 768076 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', 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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