Fitch Affirms Russian City of Kazan at 'BB-'; Outlook Stable
December 21, 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 bonds have been affirmed at 'BB-' and 'A+(rus)'.
The affirmation and Stable Outlook reflect Fitch's unchanged baseline scenario regarding Kazan's stable budgetary performance over the medium term and expectation of a gradual decline of its high direct risk in relative terms.
KEY RATING DRIVERS
The ratings reflect Kazan's high overall debt burden, which includes direct debt and subsidised loans from the federal budget, its moderate budget and weak national institutional framework. The ratings also factor in the city's satisfactory operating performance and a diversified local economy.
Fitch projects Kazan's direct risk will continue to gradually decline in relative terms, but remain high at 136% of current revenue in 2017 (2014: 157%). Around 85% 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 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 amount to RUB4.8bn at 1 January 2016, unchanged from the year before. At the same time, it will continue to gradually decrease as a share of current revenue to 22% by end-2017 (2014: 25%). 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. The city has no repayments until 2017 when it will need to refinance bank loans comprising around 15% of direct risk.
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. The 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 Kazan. From 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 in 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)