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Fitch Affirms Russia's Belgorod Region at 'BB'; Outlook Stable
December 2, 2016 / 5:11 PM / a year ago

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

(The following statement was released by the rating agency) MOSCOW, December 02 (Fitch) Fitch Ratings has affirmed the Russian Belgorod Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB', Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'AA-(rus)'. The Outlooks on the Long-Term IDRs and National rating are Stable. The region's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'. The affirmation reflects the region's stable fiscal performance, moderate, albeit growing, direct risk and contingent liabilities, amid a prolonged economic slowdown in Russia. KEY RATING DRIVERS The 'BB' ratings reflect the region's sound operating performance, moderate direct debt and a well-diversified economy. The ratings also take into account the region's exposure to contingent risk as well as the recessionary domestic environment and a weak institutional framework in Russia, which in turn negatively influences the region's credit metrics. Fitch expects the region to maintain stable fiscal performance with an operating margin of about 8%-10% in 2016-2018 (9M16: 8.7%). This will be supported by expected moderate growth of tax revenue and current transfers, along with continuing control on operating expenditure. Fitch projects average operating expenditure growth to remain close to 4% in 2016-2018 (2014-2015: average 3.4%). Belgorod's interim deficit before debt variation widened to 7.7% of total revenue at end- September 2016, from 3.5% in 2015. The larger projected deficit is attributed to capex funding needs, as the region continues to invest in roads and development of logistics and transport services. Financing flexibility remains limited with the region having already cut back capital outlays twofold to 11.7% of total spending over 2011-2015. In our view, the region's deficit is likely to widen further to 5%-7% in 2016-2017, which will lead to debt financing. Fitch projects moderate growth of the region's direct risk up to 60% of current revenue in 2016-2018 (2015: 52.2%). Belgorod's debt stock as of 1 October 2016 comprised domestic bonds (55%), budget loans (30%) and bank loans (15%). Fitch views the RUB4.9bn loan at the region's public company Obldorsnab as direct risk as Belgorod provides the company with subsidies to cover principal and interest repayments on this loan. We view Belgorod's exposure to refinancing risk as limited, with 12% of currently outstanding debt scheduled for repayments in 2016. The region's interim liquidity position was satisfactory with RUB3.5bn cash held on accounts as of 1 October 2016 (2015: RUB4.3bn), while its average monthly cash balance in 2016 stood at RUB3.9bn. We project the region's net overall risk to grow gradually before stabilising at below 80% of current revenue in 2016-2018 (2015: 67%). The region's contingent risk stems mostly from guarantees, which decreased to RUB6.9bn at end-9M16 (2015: RUB9.7bn). The region issues guarantees in support of several companies, largely operating in agriculture. Debt at Belgorod's public sector entities stabilised at RUB3.8bn in 2014-2015. Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Belgorod's forecasting ability and negatively affect the region's strategic planning, and debt and investment management The region's administration projects continued economic growth of 3%-5% per annum in 2016-2018. The region's gross regional product (GRP) expanded 2.2% in 2015 (2013-2014: 3%), according to the administration's preliminary estimates, outpacing Russia's broader economy, which contracted 3.7%. RATING SENSITIVITIES An improved national economy leading to a sustainable operating balance and debt coverage in line with the region's average maturity profile (2015: three years and six months) could result in an upgrade. Growth in direct risk to above 70% of current revenue, coupled with close to a zero current margin, could lead to a downgrade. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 9994 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 9901 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Fitch has made a number of adjustments to the official accounts in to make local and regional governments comparable internationally for analysis purposes. These adjustments include: - Transfers of capital nature received were re-classified from operating revenue to capital revenue; - Transfers of capital nature disbursed were re-classified from operating expenditure to capital expenditure. Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015775 Solicitation Status here Endorsement Policy 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 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. 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