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Fitch Affirms City of Samara at 'BB+'; Outlook Stable

February 13, 2017 | Cbonds

Fitch Ratings has affirmed the Russian City of Samara's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlooks, and the Short-Term Foreign Currency IDR at 'B'. The city's National Long-Term Rating has been affirmed at 'AA(rus)' with Stable Outlook and withdrawn.

The affirmation reflects the city's stable operating margin and narrowing fiscal deficit, which will contain direct risk at below 40% of current revenue. The ratings remain constrained by a weak institutional framework for Russian local and regional governments (LRGs).

The National-scale rating is being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see Fitch Ratings Withdraws National Scale Ratings in the Russian Federation dated 23 December 2016).

KEY RATING DRIVERS

Weak institutions in Russia lead to lower predictability of local and regional governments' (LRGs) budgetary policies, narrow their planning horizon and hamper long-term development plans. The City of Samara's policies tend to be shaped by frequent changes in allocation of revenue and expenditure responsibilities between the tiers of government.

Fitch projects Samara to post stable fiscal performance with an operating surplus of about RUB2.3 billion-RUB2.8 billion or 11%-13% of operating revenue over the medium term (2016: 11.3%; 2015: 12%). The agency views this as stabilisation following an average margin of 16% in 2013-2014. Operating performance stabilised in 2016 due to stable tax revenues and current transfers from Samara Region.

The city posted a small full-year surplus before debt variation at 0.75% of total revenue in 2016 after a deficit of 5.6% recorded in the previous year. The city has a prudent budgetary policy and targets balanced budgets for 2017-2019. The city could, however, record small deficits before debt in 2017-2018, due to sluggish economic recovery in Russia, before turning a small surplus in 2019.

In Fitch's view direct risk will remain moderate at RUB7.5 billion (or 35%-37% of current revenue) by end-2017, versus RUB7.3bn in 2016, line with our projections. We expect Samara to curb direct risk growth to below 40% of current revenue over the medium term, underpinned by the city's conservative fiscal management. The city's contingent risk is low, stemming solely from debt at its public sector entities, which they are able to fund with their own resources.

Refinancing risk is significant due to the short-term tenor of Samara's debt portfolio. The city's market debt stock (RUB7 billion) is composed of bank loans, 97% of which mature in 2017. This is partially offset by accumulated liquidity at end-2016, comprising cash (RUB599 million) and untapped credit lines (RUB1 billion). Fitch expects the city will manage to roll over the remaining maturing bank loans, as it has done in previous years.

With a population of above one million, the city is the capital of Samara Region, which has a well-developed diversified economy based on processing industries and services. The city receives steady current and capital transfers from the region, which support its development needs and fiscal performance. In its updated forecast Fitch projects a 0.4% decline of Russia's GDP in 2016, followed by 1.3% growth in 2017 and 2% in 2018.

RATING SENSITIVITIES
Strong budgetary performance with an operating margin above 15% on a sustained basis and moderate debt with a lengthening of the debt maturity profile that is in line with debt payback (direct risk-to-current revenue: 4.7 years in 2016) could lead to an upgrade.

Sustained deterioration of budgetary performance leading to a direct risk growth above 50% of current revenue (2016: 36.9%) driven by short-term financing, would lead to a downgrade.

Company: Samara

Full company nameSamara (Samara region)
Country of riskRussia
Country of registrationRussia

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