September 8, 2017 / 8:12 PM / a year ago

Fitch Affirms Russia's Tula Region at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, September 08 (Fitch) Fitch Ratings has affirmed the Russian Tula Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlooks and Short-Term Foreign Currency IDR at 'B'. The region's senior debt long-term rating has been affirmed at 'BB'. KEY RATING DRIVERS The 'BB' ratings reflect the satisfactory operating balance of Tula, which comfortably covers its interest payments, expected small deficit before debt variation and moderate direct risk. The ratings also factor in the region's moderate social-economic profile and a weak institutional framework for Russian sub-nationals. Fitch projects Tula will maintain a stable operating balance at about 8% of operating revenue over the medium term, which will comfortably cover interest payments by 4x-5x (2016: 7.7x). In 7M17, Tula has collected 54% of its full-year budgeted revenue and incurred 51% of its full-year budgeted expenses, which resulted in a small intra-year deficit of RUB569 million. Fitch expects some acceleration of expenditure in 2H17 and projects an annual deficit of RUB2.1 billion, which is about 3% of total revenue. We also forecast Tula's deficit at 3%-4% in 2018-2019. Fitch projects Tula's direct risk to remain moderate at below 35% of current revenue in 2017-2019 (2016: 25.4%). The region's interim direct risk increased immaterially to RUB16.3 billion at end-July 2017 from RUB15.7 billion at end-2016. To repay a RUB3.3 billion maturing bond Tula recently contracted a five-year RUB1.8 billion budget loan and a short-term RUB2.4 billion treasury loan. Tula's debt portfolio remains dominated by budget loans, whose share increased to 80% of direct risk at 1 August 2017 (end-2016: 59%), while bonds and bank loans composed the remaining 20%. The budget loans have low 0.1% interest rates, which help the region to save on interest payments and reduce its projected debt servicing to below 10% of current revenue in 2017-2019 from an average 17% in 2014-2016, according to Fitch's forecast. Despite the moderate debt burden, the region remains exposed to refinancing risk due to its short debt maturity. Fitch estimated Tula's average debt maturity was 2.2 years at end-2016, albeit close to the region's direct risk/current balance of 2.7 years. By end-2017, Tula has to refinance RUB4.4 billion, or about 27% of direct risk, which it will fund using bank loans and available cash balance (end-July 2017: RUB2.5 billion). As of 1 August 2017, the region had deployed all its credit lines and plans to contract more towards the year-end. The region's economy is moderate, with GRP per capita slightly below the national median. However, it benefits from a diversified processing industry and grows faster than the national average. According to the region's recently updated estimates, Tula's GRP grew 4.7% in 2016 and 5.6% in 2015, while Russia's GDP contracted. The administration expects growth to continue at 3%-4% p.a. in 2017-2018, supported by processing industries and a national economic recovery, which Fitch forecasts at 1.6%-2.2% for 2017-2018. The region's credit profile remains constrained by the weak institutional framework for Russian local and regional government (LRGs). It has a short track record of stable development compared with many of its international peers. The frequent reallocation of revenue and expenditure responsibilities within tiers of government reduces the predictability of LRGs' budgetary policies and hampers Tula's forecasting ability. RATING SENSITIVITIES Sound budgetary performance with an operating margin above 10% on a sustained basis, accompanied by moderate direct risk below 40% of current revenue, would lead to an upgrade. Conversely, weaker budgetary performance with an operating margin consistently below 5%, accompanied by a weak debt payback exceeding 10 years (2016: 2.7 years), could lead to a downgrade. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 24 06 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 Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analysis purposes. For Tula Region these adjustments include: - 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. 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