December 16, 2016 / 6:21 PM / a year ago

Fitch Affirms Russian Ryazan Region at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, December 16 (Fitch) Fitch Ratings has affirmed Russian Ryazan Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlook, Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'A(rus)' with Stable Outlook. The region's outstanding senior unsecured domestic bonds have been affirmed at 'B+' and 'A(rus)'. The affirmation reflects Fitch's view that Ryazan's direct risk will remain high but stable while the region's fiscal performance will be satisfactory for the ratings over the medium term. KEY RATING DRIVERS The 'B+' rating reflects the region's high debt and a weak Russian institutional framework. It also reflects the region's satisfactory fiscal performance amid stable economic prospects. Fitch expects the region's direct risk to increase up to 75%-80% of current revenue in 2016-2018, from an average of 70% in 2011-2014. The region's administration managed to contain interim direct risk at RUB26.8bn at end-9M16, little changed from 2014-2015. Ryazan's debt servicing ratio remains weak, with direct debt servicing exceeding 2x the region's operating balance in 2015. Additionally, the region's debt payback period in 2015 was over nine years, which is substantially more than the average maturity of the region's debt portfolio of three years. Ryazan's exposure to refinancing risk has increased, as 60% of its debt matures in 2016-2018 (45% at end-2015). Refinancing risk is in part mitigated by an increasing share of lower-cost federal budget loans, which have a 0.1% interest per annum. The region continued to repay its bonds and bank loans, replacing them with federal budget loans. As of 1 October 2016 was 67% composed of federal budget loans (43% at end-2015), 31% bank loans (50%) and 2% domestic bonds (7%). Russia's institutional framework for local and regional governments (LRGs) is a constraint on the region's ratings. It has a shorter track record of stable development than many of its international peers. Weak institutions lead to limited predictability of Russian LRGs' budgetary policies, which tend to be shaped by the federal government's constant reallocation of revenue and expenditures within government tiers. Fitch expects Ryazan to post an operating surplus of 6%-7% of operating revenue in 2016-2018, sufficient to cover interest payments. Our forecasts are based on the region's resilient tax base - which should drive a 4%-5% yoy increase of operating revenue in 2016-2018 - and on continued operating spending (opex) restraint. Ryazan posted an interim operating margin of 10.4% at end-9M16 (end-2015: 8.6%), while its interim balance before debt variation turned positive after a negative 2.1% of total revenue in 2015. This was underpinned by spending optimisation alongside stable revenue. We expect the region to post a moderate deficit before debt variation from 2016 onwards at about 5%-7% of total revenue, driven by capex funding. In Fitch's view the region's self-financing capacity should remain satisfactory, with capital revenue and current balance covering about 60% of capex (2011-2015: average 64%). At the same time Fitch expects annual capex to fall to 12% of total expenditure over 2016-2018 from an average 20% over 2011-2015. The region's latest forecast sees the local economy growing 1%-2.5% annually in 2016-2018. According to the administration's preliminary estimates, the local economy contracted 0.9% yoy in real terms in 2015 after expanding 1.7% a year earlier. The region's economy is modest in the national context but is fairly diversified and local producers benefit from the region's close proximity to Moscow, the country's largest market. RATING SENSITIVITIES A positive rating action could result from improving fiscal performance, leading to a smaller budget deficit below 5% of total revenue and an improved direct risk-to-current revenue ratio of less than 70% on a sustained basis. Increased total indebtedness with net overall risk above 90% of total revenue, accompanied by persistent refinancing pressure and a negative current balance, would 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 Elena Ozhegova Associate Director +7 495 956 2406 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 to make the LRG internationally comparable for analytical 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. - Goods and services of capital nature 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 National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016668 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. 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