Fitch Affirms Russian City of Krasnoyarsk at 'BB'; Outlook Stable
September 22, 2014 Fitch Ratings
19 September 2014: Fitch Ratings has affirmed the Russian City of Krasnoyarsk's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR 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 ratings reflect the city's moderate direct risk and developed local economy albeit exposed to the international commodity market's fluctuation. The ratings also factor in Fitch's expectation of a recovery of Krasnoyarsk's operating performance and the narrowing of its fiscal deficit after a temporary deterioration in 2013.
Fitch expects Krasnoyarsk to restore a sound operating performance, with an operating balance of 6%-8% of operating revenue in 2014-2016. The city's budgetary performance temporarily deteriorated in 2013 when the operating balance dropped to 4.2% of operating revenue from 10.4% a year earlier and the deficit before debt reached 4.9% of total revenue (2012: 3.5%). However the operating balance remains sufficient for the city's interest payment needs in 2013.
In 2013 the city suffered from decline of current transfers from the Krasnoyarsk Region caused by the deterioration of the region's budgetary performance and decline in corporate income tax proceeds due to the weakening of local companies' financial results. Operating expenditure grew by a rapid 15% in 2013 following the federal government's decision to increase public sector employee salaries. However the salary increase was mostly funded by current transfers from the Krasnoyarsk Region that were earmarked for this expenditure.
Fitch expects the city's direct risk to reach RUB8.2bn by end-2014 up from RUB7.6bn a year earlier. Direct risk corresponds to a moderate 34% of projected full-year current revenue, which is close to the 2013 level of 32.5%. The city administration intends to limit the budget deficit such that its debt burden will remain below 35% of current revenue in 2015-2016. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.
As of 1 September 2014 it only has to repay RUB460m of a maturing budget loan in 2014, which is equivalent to 6% of total direct risk. Krasnoyarsk has managed to reduce refinancing pressure in 2014. In early 2014 the city improved its debt profile by contracting several bank loans with five-year maturity totalling RUB3.5bn or 44% of direct risk as of 1 August 2015. However, the city is still exposed to a refinancing peak in 2015, when it has to repay RUB4bn or 50% of total debt stock. Fitch expects the city will successfully refinance the bank loans due in 2015 with new loans with the same banks.
With a population of above one 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, which provides a strong tax base but exposes the city to volatile business cycles. The City of Krasnoyarsk receives an insignificant amount of financial aid in the form of general-purpose grants from the Krasnoyarsk region as its budget capacity is higher than that of other municipalities in the region.
Easing refinancing pressure with a longer direct risk maturity profile matching the city's debt coverage (direct risk/current balance), coupled with sound budgetary performance in line with 2011-2012 levels, would lead to an upgrade.
Deterioration of budgetary performance with an operating margin permanently below 5%, coupled with increasing refinancing pressure stemming from short-term bank loans, would lead to a downgrade.
Company — Krasnoyarsk
Full nameKrasnoyarsk city