Fitch Affirms Russian City of Krasnoyarsk at 'BB'; Outlook Stable
September 30, 2013 Fitch Ratings
Fitch Ratings has affirmed the Russian City of Krasnoyarsk's Long-term foreign and local currency ratings at 'BB', with Stable Outlooks, and Short-term foreign currency rating at 'B'. The agency has also affirmed the city's National Long-term rating at 'AA-(rus)' with a Stable Outlook.
KEY RATING DRIVERS
The affirmation reflects the developed local economy, sound budgetary performance and still moderate, albeit growing direct risk. The ratings also factor in the city's continuous budget deficit driven by high capital expenditure, and refinancing pressure due to a large proportion of short-term bank loans in Krasnoyarsk's direct risk structure.
Fitch expects Krasnoyarsk's operating performance to stabilise, with an operating margin of 10%-11% in 2013-2015. The operating balance remains satisfactory for the city's debt servicing needs. Operating expenditure is under pressure because of promises made by the federal government of salary increases, but these are mostly compensated for by earmarked transfers from Krasnoyarsk region and rapid increase of tax revenue.
Fitch expects an increase of 19% yoy in tax proceeds compared with 2012, which should compensate a 10% decline of current transfers from the regional budget in 2013. With a population of about 1 million, the city is the capital of Krasnoyarsk Region, one of the top 10 Russian regions by gross regional product. It has a strong industrial sector dominated by metallurgy and machine-building, which provides a strong tax base but exposes the city to volatile business cycles.
Fitch expects the city's direct risk will grow to RUB7.6bn by end-2013, which corresponds to a moderate 30% of current revenue. Debt will increase to 35% of current revenue in 2014-2015. The city has recorded a deficit before debt variation since 2008 and Fitch forecasts a deficit in 2013-2015. It is driven by high capital spending, which has constantly exceeded 20% of total expenditure during the past five years.
Krasnoyarsk's direct risk maturity profile is shorter than its debt coverage ratio (direct risk/current balance) of three years. Debt is dominated by bank loans with an average maturity of between one and two years. More than half of the city's liabilities expire within next 12 months, creating refinancing pressure. Immediate risk is mitigated by several unused credit lines totalling RUB3.4bn. These exceed the RUB1.9bn of short-term liabilities due in October-December 2013.
The region's contingent risk is immaterial and limited to minor indebtedness in Krasnoyarsk's municipal public companies. However, the city traditionally provides subsidies to public transportation companies.
Easing refinancing pressure with a longer direct risk maturity profile matching the city's debt coverage, coupled with maintenance of a sound budgetary performance in line with Fitch's forecast would lead to an upgrade.
Deterioration of budgetary performance with operating margin below 5% and significant increase of short-term direct risk would lead to a downgrade.
- Russia's economy will continue to demonstrate modest economic growth. Fitch does not expect dramatic external macroeconomic shocks, which could lead to significant deterioration of the city's tax base.
- The tax sharing system between Krasnoyarsk City and Krasnoyarsk Region will remain stable. Krasnoyarsk will continue to receive a steady flow of transfers from Krasnoyarsk Region, the bulk of which will be earmarked to particular social spending.
- Krasnoyarsk will continue to have fair access to the domestic financial markets sufficient for refinancing of maturing debt.
Company — Krasnoyarsk
Full nameKrasnoyarsk city