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Fitch Affirms Russia's Lipetsk Region at 'BB+'; Outlook Stable
September 8, 2017 / 8:12 PM / 2 months ago

Fitch Affirms Russia's Lipetsk Region at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, September 08 (Fitch) Fitch Ratings has affirmed the Russian Lipetsk Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'B'. The region's senior unsecured debt ratings have been affirmed at 'BB+'. The affirmation reflects Fitch's largely unchanged base case scenario regarding the region's sound operating performance and moderate direct risk in the medium term. KEY RATING DRIVERS The 'BB+' ratings reflect the region's sound budgetary performance with an operating margin above 10% and healthy liquidity. They also take into account the high concentration of the regional economy in ferrous metallurgy, which makes the region vulnerable to steel market fluctuations and consequently volatile tax revenue. Fitch projects the region's budgetary performance will remain sound with an operating margin of 11%-12% over the medium term. In 2015-2016 the operating margin reached a high of 15% as corporate income taxes rose sharply. In particular, the region's top taxpayer, export-oriented PJSC Novolipetsk Steel (BBB-/Stable), benefited from rouble depreciation. The volatility of the region's finances is partly mitigated by the administration's prudent approach, which sets aside excess tax proceeds as cash reserves and keeps expenses under control. In 1H17 the region recorded a RUB2 billion interim surplus on controlled expenditure and tax revenue growth. Tax proceeds grew 18% yoy, mainly driven by personal income tax (up 54% yoy as a result of one-off payment by high net worth individual), while corporate income tax proceeds increased 4% yoy weighed down by the negative effect of rouble appreciation and higher prices of raw materials in the steel sector. We expect higher expenditure in 2H17 and a year-end deficit of RUB2 billion, which we assume will be financed mostly by cash reserves. Fitch projects the region's direct risk will remain stable and moderate at below 40% of current revenue (2016: 37%). During 7M17, the region's debt decreased to RUB15.6 billion from RUB17.4 billion as the administration repaid maturing bank loans, budget loan and bonds. The region also contracted RUB1.3 billion of subsidised budget loans at 0.1% interest rate. As with most regions in Russia, Lipetsk Region is exposed to refinancing pressure in 2017-2019 when 82% of direct risk (RUB12.8 billion as of August 2017) matures. Despite a concentrated debt maturity profile, the region has manageable refinancing risks due to moderate debt levels, sound liquidity and access to federal loans. For 2017 refinancing needs are limited to RUB1.4 billion (9% of total outstanding debt), which is fully covered by cash reserves (RUB5.8 billion as of August 2017). Lipetsk Region has a well-developed industrialised economy with a focus on the ferrous metallurgy sector, supporting wealth metrics above the national median. In 2016, gross regional product grew 2.2% versus a 0.2% fall in the wider Russian economy. The ferrous metallurgy sector contributed 58% of the region's industrial output and around 37% of total tax proceeds in 2016, making the regional economy vulnerable to fluctuations in the domestic and international steel markets. The region's credit profile as constrained by the weak Russian institutional framework for sub-nationals, which has a shorter record of stable development than many of its international peers. The predictability of Russian local and regional governments' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES An operating margin sustainably above 15%, accompanied by sound debt metrics with a direct risk-to-current balance (2016: 3.6 years) being in line with the weighted average debt maturity profile (2016: 2.5 years), would lead to an upgrade. Growth of direct risk, accompanied by deterioration in the operating margin leading to a debt payback of above 10 years on a sustained basis, would lead to a downgrade. Contact: Primary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 24 05 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Fitch has made a number of adjustments to the official accounts in order to make local and regional governments comparable internationally for analytical purposes: - Transfers of capital nature received were re-classified from operating revenue to capital revenue. - Transfers of capital nature made were re-classified from operating expenditure to capital expenditure. - Goods and services of capital nature were re-classified from operating expenditure to capital expenditure. 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. 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