Fitch Affirms Kaluga Region at 'BB'; Outlook Stable

Fitch Ratings has affirmed Kaluga Region's Long-term foreign and local currency ratings at 'BB', with Stable Outlooks, and its Short-term foreign currency rating at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with Stable Outlook. Kaluga's outstanding senior unsecured domestic bonds (ISIN RU000A0JRHN7) of RUB2.5bn have also been affirmed at 'BB' and 'AA-(rus)'. KEY RATING DRIVERS The affirmation reflects the administration's efficient and proactive management, the region's rapid economic development and sound budgetary performance. The ratings also factor in increasing pressure on operating expenditure and contingent risk stemming from the liabilities of public sector entities (PSEs), although the maturity profile of these liabilities is long-term. Fitch expects Kaluga will continue to demonstrate sound operating performance, supported by further expansion of its tax base. The agency expects the full-year operating balance will stabilise at about 10%-12% of operating revenue in 2013-2015, down slightly from an average of 15.4% during 2010-2012. This is due to increasing operating expenditure pressure as a result of national government decisions to increase public sector salaries and reduce transfers from the federal budget. The regional administration is focussed on local economic development and on expanding the tax base. Kaluga has been successful in attracting foreign investments, promoting industrial production and innovation. These policies have allowed the local economy to grow at a cumulative 32.8% in 2010-2012, well above the 12.7% for the Russian Federation. The region actively uses PSEs to finance local investment projects. It established The Development Corporation of Kaluga Region, which at end-2012 borrowed RUB6.4bn to finance the development of regional industrial zones. Two other regional public companies incurred a combined RUB1.3bn debt in early 2013 to finance various investment projects. The region provides subsidies to cover the principal and interest on the debt of these PSEs. Consequently, Fitch considers the liabilities of those PSEs as the region's direct risk. Fitch expects Kaluga's direct risk to reach RUB22.3bn in 2013 which corresponds to 63% of expected full-year current revenue, up from 56.5% in 2012. The agency expects that debt will increase in absolute amount, driven by expected RUB3.3bn and RUB2.3bn deficits in 2014 and 2015 respectively. However, expected fast growth of operating revenue should lead to the debt burden stabilising at 63% in 2014, before easing to 60% in 2015-2016. Kaluga is not exposed to high immediate refinancing risk as it has only RUB672m (about 3% of direct risk) due in November and December this year. However, the region will need to repay 80% of direct risk (RUB18.4bn) in 2014-2016, mostly bonds, bank loans and loans from the federal budget. Fitch expects the region will refinance the maturing liabilities with new bank loans. PSEs' liabilities have a long-term maturity profile till 2022. RATING SENSITIVITIES A continuous sound operating performance with operating margins of 12%-14%, underpinned by economic growth, and maintaining debt coverage in line with the region's average debt maturity, would lead to an upgrade. Widening of the deficit before debt variation leading to direct risk increase above 75% of current revenue and/or deterioration in debt coverage beyond 10 years (2012: 4.8 years) would lead to a downgrade. KEY ASSUMPTIONS - Russia has an evolving institutional framework with a system of intergovernmental relations between federal, regional and local governments still under development. However, Fitch expects Kaluga will continue to receive a steady flow of transfers from the federation - Russia's economy will continue to demonstrate modest economic growth. Fitch does not expect dramatic external macroeconomic shocks - The federal government's budgetary performance will remain sound, which will support Kaluga - Kaluga will continue to have fair access to domestic financial markets to enable it to refinance maturing debt

• Full name
  Kaluga region ministry of finance
• Registration country
  Russia