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Fitch Affirms City of Krasnoyarsk at 'BB'; Outlook Stable

October 1, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-01 October 2012: Fitch Ratings has affirmed the Russian City of Krasnoyarsk's Long-term foreign and local currency ratings at 'BB', Short-term foreign currency rating at 'B' and National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term ratings are Stable.
The affirmation reflects the city's strong local economy, sound budgetary performance, an improving infrastructural environment and still moderate direct risk. The ratings also factor in the city's high investment needs resulting in an increase in direct risk, and high refinancing needs stemming from a short-term debt maturity profile.
Fitch notes that maintenance of sound budgetary performance with operating balance averaging 14% of operating revenue in the two subsequent years coupled with direct risk stabilisation below 30% of current revenue would lead to an upgrade. Conversely, deterioration of budgetary performance with operating margin at about 5% and/or insufficiency of operating balance to cover debt refinancing needs would lead to a downgrade.
Fitch expects Krasnoyarsk's operating performance to stabilise with an operating balance at about 10% of operating revenue in 2012-2014. This is below than pre-crisis average margins of 24% in 2007-2008. However, the operating balance remains satisfactory for the city's debt servicing needs. Operating expenditure is under pressure because of promises on salary increases made by the federal government, but this would be compensated by higher transfers from the budget of Krasnoyarsk region and tax revenue increase.
Krasnoyarsk's direct risk has a short-term maturity profile, which poses high refinancing risk. It is dominated by bank loans and loans from the regional budget with an average maturity of between one and two years. About 93% of the city's liabilities expire in 2012-2013, creating high refinancing pressure. Immediate refinancing risk is mitigated by several unused credit lines of RUB3.7bn at Sberbank ('BBB'/Stable/'F3'). These exceed the RUB3.1bn of short-term liabilities due in October-December 2012.
The city has constantly recorded deficit before debt variation since 2008 and Fitch forecasts deficits in 2012-2014. It is driven by high capital spending, which has constantly exceeded 20% of total expenditure during the past five years. This has led to an increase in debt as about 20% of capex was financed by new borrowing.
Fitch expects the city's direct risk to be about RUB6.8bn by end-2012, which corresponds to a moderate 28% of current revenue. Debt will gradually increase to about 33% of current revenue in 2013-2014. Debt coverage (direct risk/current balance) will remain below four years in 2012-2014, which exceeds the average debt maturity of the city's debt of two years.
With a population of 998,082 inhabitants (2011), the city is the capital of Krasnoyarsk Region, which is one of the top 10 Russian regions by gross regional product and the second-largest Russian region by area. The city's economy has a strong industrial sector dominated by metallurgy and machine-building. This gives it a strong tax base, but also exposes it to volatile business cycles in non-ferrous metallurgy.
Company — Krasnoyarsk
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    Krasnoyarsk city
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