August 1, 2014 / 4:05 PM / in 3 years

Fitch Rates Russian City of Nizhniy Novgorod 'BB'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Nizhniy Novgorod City - Rating Action Report here LONDON/MOSCOW/FRANKFURT, August 01 (Fitch) Fitch Ratings has assigned the Russian City of Nizhniy Novgorod Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BB', with Stable Outlooks and a Short-term foreign currency IDR of 'B'. The agency has also assigned the city a National Long-term rating of 'AA-(rus)' with Stable Outlook. KEY RATING DRIVERS The ratings reflect the city's stable budgetary performance, with its operating balance fully covering interest payments, its developed local economy, and moderate, albeit growing, direct risk. The ratings also factor in on-going fiscal deficit and refinancing pressure from a large proportion of short-term bank loans in the city's direct risk structure. Fitch expects Nizhniy Novgorod's operating performance to stabilise, with an operating balance averaging 6% of operating revenue in 2014-2016, unchanged from 2013. Operating expenditure is under pressure from the federal government's pledge to increase public sector salaries, although these are mostly offset by earmarked transfers from the Nizhniy Novgorod region (BB/Stable/B) and by increasing tax revenue. Fitch expects the city's direct risk will grow to RUB6.6bn by end-2014, or a moderate 30% of current revenue and RUB8.7bn or 33% by end-2016, from RUB5.2bn in 2013. We forecast a deficit for 2014-2016, extending the deficit trend since 2008. High opex growth driven by staff cost increase fuelled the deficit in 2013 and 2014. This came on top of high capital spending, which has constantly exceeded 20% of total expenditure in the past. Nizhniy Novgorod's direct risk is dominated by bank loans with an average maturity of between one and two years. As of 1 July 2014 about 90% of the city's liabilities were due in December 2015. The city intends to tap the domestic bond market in 2015 by issuing RUB3bn domestic bonds with a five-year maturity. If the placement is successful it would replace a notable part of outstanding short term bank loans and mitigate refinancing pressure. The city receives steady current transfers from the regional budget. Most of them (56% of current transfers in 2013) are earmarked for financing delegated responsibilities, mainly teachers' salaries. The remaining 44% are grants to co-finance municipal programmes. Nizhniy Novgorod receives only modest general-purpose financial aid from the region as its budget capacity is higher than the average municipality in the region. With a population of above one million, the city is the capital of Nizhniy Novgorod region, one of the top 15 Russian regions by gross regional product, providing a strong and growing tax base. Fitch expects an increase of 18% in tax revenue for 2014, which will compensate for a deceleration of current transfers from the regional budget. The city's tax proceeds comprise stable personal income and property taxes, which makes the city resilient to volatile business cycles. RATING SENSITIVITIES A positive rating action may result from easing refinancing pressure and maintenance of a sound current balance, leading to direct risk coverage (current balance to direct risk) being in line with the debt maturity profile. A negative rating action may result from further growth of short term debt alongside deterioration of budgetary performance with the operating balance insufficient to cover interest payments. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956 9901 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Associate Director +7 495 956 9965 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:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available at 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 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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