Fitch Affirms Russia's Kaluga Region at 'BB'; Outlook Stable
March 21, 2016
Fitch Ratings has affirmed Russian Kaluga Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlooks, and Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with Stable Outlook. Kaluga's senior unsecured domestic debt has been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects Fitch's unchanged base line scenario regarding the region's sound operating performance and growing direct risk, which is mitigated by a high proportion of loans from the federal budget with lower cost of borrowing.
KEY RATING DRIVERS
The 'BB' rating reflects the increasing tension in the national economic environment, high direct risk with persistent refinancing pressure and Russia's weak institutional framework. The ratings also factor in the administration's efficient and proactive management focused on the region's rapid investment-driven economic development and sound operating performance.
Fitch expects Kaluga to continue demonstrating a solid operating performance, supported by its diversified tax base. The agency expects the operating balance to be close to 14% of operating revenue in 2016-2018, which is a moderate deterioration from a high margin of 16.5% in 2015 but in line with the 2011-2014 historical average. Tax revenue growth has decelerated due to a 12% decline in corporate income tax (CIT) as a result of sluggish economic performance. The CIT contraction was compensated by growth of other taxes, particularly property tax (+35.4%) and personal income tax (+6.4%). Absolute tax revenue growth was supported by increased tax rates and tax bases for some taxes and also reflected relatively high national inflation, which accounted for 12.9% in 2015.
Kaluga is focused on local economic development and has successfully attracted foreign investments and promoted industrial production. This policy resulted in rapid growth of the tax base, but also led to a high debt burden of the region, albeit linked to infrastructure development. At 1 January 2016, direct risk reached 89.3% of current revenue (RUB35.6bn) and was dominated by subsidised loans from the federal budget (41%) followed by bank loans (32%). The remainder is mostly debt of the Development Corporation of Kaluga Region (DCKR).
DCKR was established by the region to finance local investment projects, namely the development of regional industrial zones. The region provides subsidies to cover the principal and interest on DCKR's debt. Consequently, Fitch considers DCKR's liabilities as the region's direct risk. At 1 January 2016, DCKR's liabilities amounted to RUB8.4bn of long-term loans from state development institution Vnesheconombank (BBB-/Negative/F3), up from RUB6.9bn a year earlier. This constitutes about 25% of Kaluga's current revenue at end-2015. Positively, DCKR's liabilities have a smooth maturity profile between 2018 and 2022.
Fitch expects the region's deficit before debt variation to halve to 7% of total revenue from an average 12.3% in 2013-2015. This will mostly result from lower capital expenditure and the overall intention of the region's government to implement cost control measures. Fitch therefore forecasts direct risk growth to slow down in absolute terms during 2016-2018, while operating revenue growth should allow the overall debt burden to stabilise below 95% of current revenue (2015: 89.3%).
As with most Russian regions, Kaluga is exposed to refinancing pressure in the medium term. It faces repayment of 74% of its outstanding liabilities, in 2016-2018. Fitch expects the region will substitute part of the maturing bank loans with new loans from the federal budget (RUB3.2bn have already been received in 1Q16) and roll over the remaining maturing bank loans with the same banks. However, volatile interest rates in domestic markets could make new debt more expensive and may put pressure on the region's current margin.
The region's credit profile remains constrained by the weak institutional framework for Russian LRGs, which has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between tiers of government.
Sustainably sound operating performance with an operating margin close to 15% coupled with stabilisation of direct risk (including DCKR's debt) at the current level (2015: 89.3% of current revenue) and easing of refinancing pressure could lead to an upgrade.
Inability to limit direct risk growth and weakening in budgetary performance leading to permanent deterioration in debt coverage (direct risk to current balance) beyond 12 years (2015: 7.4 years) would lead to a downgrade.
Company — Kaluga region
Full nameKaluga region ministry of finance