Reuters logo
Fitch: Floating-Rate Loans May Raise Russia LRGs Long-Term Risks
October 17, 2016 / 10:47 AM / a year ago

Fitch: Floating-Rate Loans May Raise Russia LRGs Long-Term Risks

(The following statement was released by the rating agency) LONDON, October 17 (Fitch) Access to floating-rate bank loans should reduce Russian local and regional governments' (LRGs) funding costs in the short term, but adds to their exposure to interest rate risk, given their limited hedging capacity, Fitch Ratings says. On 6 October, the Russian government amended its federal procurement law, allowing Russian LRGs to borrow from banks at a floating rate, set with reference to the Central Bank of Russia's (CBR) key rate, which it cut to 10% from 10.5% last month. Previously, regions and municipalities had to pay a fixed interest rate when taking out bank loans. This change should reduce LRGs' interest expenditure, as existing fixed-rate bank loans are refinanced at a lower rate. Savings are likely to be small initially and will depend on the margin above the CBR rate that banks charge (this may be narrow, as overall bank funding costs are below the CBR rate). The long-term benefits may be more tangible if the CBR continues to gradually lower rates over 2017 and 2018 (we forecast 8.5% at end-2017 and 7.5% at end-2018), although banks have repaid much of the CBR funding made available in 2014-2015 and we forecast CBR funding will be fully repaid by end-2016. However, even though LRGs have until recently been restricted to fixed-rate borrowing, sharp rate rises have had a marked impact on their budgets due to their debt maturity profiles, which are typically short-term. This means fixed-rate loans and bonds have to be frequently refinanced. This was seen in 2015, when LRGs' interest expenditure rose by 20% yoy. This came after the CBR increased its base rate to 17% from 10.5% at the end of 2014, as the collapse in oil prices put the rouble under sustained pressure. Even though LRGs had borrowed in the market at fixed rates, short-term debt had to be refinanced at rates of close to 25% early in the year. The CBR's key rate should be less volatile than market rates, but the impact of changes to the policy rate will be felt more immediately. It is not clear how effectively LRGs would manage interest rate risk. They have exhibited prudent debt management, with a focus on minimising interest expenditure, but the previous restriction on floating-rate borrowing means that their ability to hedge against rising rates is untested to date. Russian banks do not have lot of floating-rate liabilities and interest rate risk hedging in Russia is underdeveloped and expensive. Their short-term debt maturity profiles have traditionally exposed Russian LRGs to refinancing risk; however, it is mitigated by the availability of cheap federal budget loans earmarked for repayment of maturing debt. Bank loans accounted for 31% of direct risk (bonds and bank loans plus 'other Fitch-classified debt', including federal budget loans) for regions at 1 September 2016. The proportion of market debt (bonds and bank loans) fell to 48% of total direct risk from 63% at the start of the year, but we think this is mainly due to a seasonal effect, and we expect the balance between market debt and federal budget loans to return to around 60:40 by year-end, as short-term loans from the federal treasury are repaid. Aggregate market debt to total revenue is low (17% in 2015). The aggregate RUB410bn surplus that the regions posted to 1 September is consistent with our view that signs of financial stabilisation are emerging. However, the surplus largely reflects delayed execution of capex, and we expect higher spending over 4Q to lead to a full-year deficit of around RUB180bn, or 8% of the regions' total debt stock (compared with 12% in 2015). Contact: Vladimir Redkin Senior Director International Public Finance +7 495 956 9901 Fitch Ratings CIS Ltd 26 Valovaya St. Moscow, 115054 Anton Lopatin Director Financial Institutions +7 495 956 7096 Mark Brown Senior Analyst Fitch Wire +44 20 3530 1588 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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 WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below