Fitch Affirms Russian City of Kazan at 'BB-'; Outlook Stable
July 20, 2015 Fitch Ratings
Fitch Ratings-London/Warsaw/Frankfurt-17 July 2015: Fitch Ratings has affirmed the Russian City of Kazan'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 'A+(rus)' with Stable Outlook.
The city's outstanding senior unsecured domestic bond ratings have been affirmed at 'BB-' and 'A+(rus)'.
The ratings reflect Kazan's high direct risk, which includes subsidised loans from the Republic of Tatarstan. The ratings also factor in the city's satisfactory operating performance and a strong diversified local economy.
KEY RATING DRIVERS
Direct risk accounted for 157% of current revenue in 2014 (2013: 160%). The bulk of direct risk relates to RUB25.4bn subsidised loans from Tatarstan, which were earmarked for infrastructure development in preparation for Universiade 2013. The remainder is represented by RUB4.8bn market debt comprising mostly bank loans.
In February 2013, the terms of Kazan's budget loan repayment were significantly relaxed, with the introduction of a grace period until 2023 and principal amortisation in 10 annual instalments from 2023 to 2032. The extension of the budget loans implies a moratorium on market debt increase, which means the city can now only incur new market debt for refinancing needs, not for deficit financing.
Fitch expects the city's direct debt (bank loans and issued debt) will remain stable in the absolute amount but will continue to gradually decrease as a share of current revenue to 22% by end-2017 (2014: 25%). As of 1 January 2015 the city's direct debt stood at RUB4.8bn, unchanged from the year before. The city improved its debt maturity profile during 2014, replacing almost all short-term bank loans with new revolving credit lines with a final maturity in 2017. This helped ease refinancing pressure and lowered interest costs. During 2015-2016 the city needs to repay only 1% of its direct debt.
Fitch expects Kazan's operating balance to reach 6%-7% of operating revenue in 2015-2017, supported by operating spending restraint and tax-driven revenue growth. Operating margin in 2014 was 4.3%, little changed from 2013.
In 2014 Kazan's tax revenue was negatively affected by lower personal income tax (PIT), the largest tax contributor to the city's budget. This was due to a redistribution of revenue sources and spending responsibilities between the Republic of Tatarstan and the City of Kazan. Since 2014 general healthcare was transferred to the republic from the city. In return the republic reduced the proportion of PIT to be transferred to Kazan's budget to 15% in 2014 from 23.4% in 2013.
Kazan is the capital of Tatarstan (BBB-/Negative/F3), one of the most developed Russian regions. The city has received large capital transfers from the republic over the past nine years to finance its capex. Fitch expects the republic to remain supportive, if necessary.
The city's economy is well-diversified and has a developed industrial sector. The latter is dominated by petrochemicals, machine-building and food processing. In 2012-2014 the city's economy grew at a more rapid pace than the national economy. For 2014, the city's GDP grew 2.5% and the administration expects average growth of 2%-3% annually in 2015-2017.
A gradual decline of direct risk in relative terms accompanied by stable operating balance at around 7% of operating revenue, could lead to an upgrade.
An increase of direct debt to above 50% of current revenue, and/or further deterioration of operating balance close to zero could lead to a downgrade.
Company — Kazan
Full nameKazan (City)