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Fitch Affirms Russian Orenburg Region at 'BB'; Outlook Stable

February 20, 2017 | Cbonds

Fitch Ratings has affirmed the Russian Orenburg 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 The region's National Long-Term rating has been affirmed at 'AA-(rus)' with a Stable Outlook and withdrawn.

The region's senior debt long-term rating has been affirmed at 'BB'. The region's senior debt National long-term rating has been affirmed at 'AA-(rus)' and withdrawn.

The affirmation and Stable Outlook reflect Fitch's unchanged base case scenario regarding the region's stable operating performance and debt metrics over the medium-term.

The National-scale rating is being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see "Fitch Withdraws National Scale Ratings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

The 'BB' rating reflects the region's moderate direct risk with limited exposure to refinancing risk, low contingent liabilities and improved fiscal performance. The ratings also take into account the concentration of the region's tax base in oil and gas companies as well as a weak institutional framework for Russian sub-nationals.

Fitch expects the region will continue to demonstrate stable fiscal performance over the medium-term with an operating margin of above 10%. This will be supported by continuous control over operating spending and moderate expansion of the tax base. We project that the administration will keep the deficit before debt at about 3% of total revenue in 2017-2019.

In 2016 the operating margin increased to 15% from 10% in 2014-2015 as the region cut operating spending by almost 12% yoy. The region's total tax revenue remained almost unchanged in 2014-2016. This is because growth of most taxes was offset by declining corporate income tax revenue, which is the largest tax contributor to the regional budget. The latter has been negatively affected by adverse trends on the international oil and gas markets. Deficit before debt variation was at 0.6% of total revenue in 2016 - the smallest since 2011, allowing Orenburg to curb debt growth.

Fitch assumes the region will maintain healthy debt metrics with direct risk not exceeding 45% of current revenue in 2017-2019. In 2016, direct risk accounted for 39%, slightly up from 36% the year before. The debt structure remained almost unchanged, though the proportion of subsidised budget loans increased to 51% in 2016 from 44% in 2015. Issued debt made up 43% of direct risk while bank loans represented 6% as of 1 January 2017.

The region's maturity profile is longer than for most Russian peers, limiting immediate refinancing pressure. The weighted average maturity of the region's direct risk was 5.4 years as of 1 January 2017, longer than the region's debt payback ratio (direct risk-to-current balance) of three years.

The region managed to reduce interest spending in 2016 to RUB1.6 billion from RUB1.8 billion in 2015 by increasing the share of subsidised budget loans in its portfolio and effectively managing cash mismatches. To cover intra-year cash gaps the region used short-term federal treasury loans provided at 0.1% annual interest rate with a maturity up to 50 days.

In 2017, the region has to redeem RUB2.1 billion of amortising domestic bonds and RUB2.7 billion of budget loans, together representing 18% of the region's total direct risk. The administration is planning the issue of a RUB4 billion domestic bond in 2017 with a maturity up to 10 years and has already agreed with the federal government for an additional RUB1.7 billion budget loan. The region's untapped credit lines amounted to RUB3.2 billion as of 1 January 2017.

The region's contingent risk is low. On 7 February 2017 JSC Orenburg Housing Mortgage Corporation redeemed the residual part of its RUB1 billion domestic bond, which was guaranteed by the region. This led to a further reduction of the region's contingent liabilities, which now represent less than 2% of operating revenue.

Orenburg's economy is dominated by oil and gas companies, which provide a sustainable tax base. However, the concentration in one particular sector exposes the region to potential changes in the fiscal regime, business cycles or price fluctuations. According to the administration's estimates the regional economy contracted 0.9% yoy in 2016, which is broadly in line with national contraction of 0.4%. For the medium-term the administration projects modest regional growth of 1%-2% per annum.

The region's credit profile is constrained by the evolving nature of Russia's institutional framework for local and regional governments (LRGs). It has a short track record of stable development compared with many of its international peers. The unstable intergovernmental set-up reduces the predictability of LRGs' budgetary policies and hampers Orenburg's forecasting ability.

The ratings could be positively affected by a sustained debt payback ratio of below four years and direct risk remaining below 40% of current revenue.

The ratings could be negatively affected by consistently weaker budgetary performance with an operating margin below 5% and direct risk increasing above 60% of current revenue.

Company: Orenburg region

Full company nameOrenburg region
Country of riskRussia
Country of registrationRussia


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