Fitch Affirms Russian City of Kazan at 'BB-'; Outlook Stable
June 14, 2016
10 June 2016 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 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 reflects Fitch's unchanged base case scenario regarding Kazan's high but stable direct risk, modest budget, and a small deficit before debt variation over the medium term.
KEY RATING DRIVERS
The ratings reflect the high direct risk of Kazan driven by large capex in the past, its modest budget with a low operating balance and a weak institutional framework for Russian sub-nationals. The ratings also factor in a diversified local economy with stagnant gross city product, amid a recession in Russia, and potential support from the Republic of Tatarstan (BBB-/Negative/F3).
Fitch projects Kazan's operating performance to remain adequate over the medium term with an operating balance below 5% of operating revenue (2015: 2.4%) and a close to zero current balance (2015: -0.6%). We expect the city's administration to maintain cost control to limit the growth of operating expenditure while tax flexibility remains weak. We also expect decreasing interest payments due to interest rates on budget loans being reduced to 0.1% from 0.5% from 2016 onwards.
Fitch projects deficit before debt variation to remain small at 1%-2% of total revenue over the medium term, after an average 0.6% in 2014-2015, as the administration seeks to balance the budget amid implied restrictions on new market borrowings (bank loans and bonds) other than for refinancing needs. We therefore project the city's direct debt to stabilise at RUB4.8bn in 2016-2018, equal to 20%-25% of current revenue.
We expect Kazan's direct risk to remain high over the medium term, before moderately declining towards 135% of current revenue in 2018, from 154% in 2015. Around 85% of direct risk relates to RUB25.4bn budget loans from Tatarstan, which were allocated to infrastructure development in preparation for Universiade 2013. The high debt is mitigated by the city's long-term maturity profile with a grace period until 2023 and principal amortisation in 10 annual instalments to 2032.
Short-term refinancing risk is low as Kazan has no bank loans maturing until 2017, when it will need to refinance all its bank loans. We expect the city will have reasonable access to domestic financial markets to enable it to refinance maturing debt.
Kazan is the capital of Tatarstan, one of the most developed Russian regions. 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 2015, Kazan's gross city product was stable in real terms, according to the city's administration. It outpaced the national economy, which contracted 3.7%. The administration estimates the city's economy will grow 1% in 2016 and about 3% annually in 2017-2018.
A gradual decline of direct risk relative to current revenue, accompanied by an improving operating balance to around 7% of operating revenue, could lead to an upgrade.
An increase in direct debt to above 50% of current revenue or a weakening of the operating balance towards zero could lead to a downgrade.
Company — Kazan
Full nameKazan (City)