Fitch Affirms Kaluga at 'BB'; Outlook Stable
November 1, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-31 October 2012: Fitch Ratings has affirmed the Russian Kaluga Region's Long-term foreign and local currency ratings at 'BB' and National Long-term rating at 'AA-(rus)'. The Outlooks are Stable. The region's Short-term foreign currency rating has been affirmed at 'B'.
The affirmation reflects the high quality of the region's management, its rapid economic development and expected stabilisation of direct risk. The ratings also factor in the increasing pressure from operating expenditure and contingent risk, stemming from the liabilities of public sector entities (PSEs), although the profile is long term.
Fitch notes an upgrade would be subject to a continuous sound operating performance with operating margins at about 12%-14% underpinned by economic buoyancy, containment of refinancing risk and maintenance of debt coverage (direct risk to current balance) in line with average debt maturity. Conversely, widening of the deficit before debt variation leading to significant direct risk increase and deterioration of debt coverage above 10 years would lead to a downgrade.
The administration of the Kaluga region is aimed at industrial development through the formation of industrial zones and techno parks, and the attraction of direct foreign investment into the region. This underpinned the fast expansion of the local economy with an accumulated 23% growth in 2010-2011, far above the growth of 9% for the Russian Federation. The administration forecasts further economic development, with growth of 11.8% in 2012 and average annual growth of 10% in 2013-2014.
Fitch expects that continuous economic growth would lead to a further tax base expansion, which will compensate increasing pressure from operating expenditure. Fitch expects the region's full-year operating balance to stabilise at about 12%-14% of operating revenue in 2012-2014. The region recorded a moderate deterioration in the operating balance in 2011 due to a one-off drop in corporate income tax proceed and increasing operating expenditure pressure. However, operating margin was still sound at 12.6% (2010: 16.4%).
The region actively uses its PSEs to finance investment projects in the region. It established the Development Corporation of Kaluga Region, which borrowed RUB5.7bn to finance the development of the regional industrial zones. Three other regional public companies are also involved in various investment projects and took RUB1.9bn for this purpose. The region provides subsidies to cover the principal and interests of the debt of these PSEs. Consequently, Fitch considers the liabilities of those PSEs as direct risk.
Kaluga is exposed to refinancing risk as it needs to repay RUB3.1bn (about 18% of direct risk) in November-December this year. This includes RUB2bn of bank loans and RUB700m of maturing domestic debt. Fitch expects that the region will roll over the bank loans and substitute the remaining maturing liabilities with new bank loans. For this purpose, Kaluga has an already committed RUB4bn credit line with Sberbank ('BBB'/Stable/'F3').
Fitch expects a stabilisation in Kaluga's direct risk at about RUB21bn and a gradual decline in the debt burden to 52%-55% during the next three years from a peak of 65% of current revenue in 2011. The debt burden, including the principal of several PSEs, will reach RUB20.5bn be year-end up from RUB18.9bn at the beginning of 2012. However, the debt coverage ratio remains satisfactory at about seven years in 2012, which is in line with the debt maturity that stretches until 2019.
Kaluga Region is in the centre of the European part of the Russian Federation, bordering the Moscow Region to the south-west. The region's capital, the City of Kaluga, has 325,200 inhabitants and is located 180km from Moscow. The region accounted for 0.5% of the country's GDP and 0.7% of its population.
Company — Kaluga region
Full nameKaluga region ministry of finance