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Fitch Revises Russian Nizhniy Novgorod Region's Outlook to Stable; Affirms at 'BB'

March 06, 2017 | Cbonds

Fitch Ratings has revised Russian Nizhniy Novgorod Region's Outlook to Stable from Negative and affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB' and Short-Term Foreign Currency IDR at 'B'. The Outlook on the region's National Long-Term Rating has been revised to Stable from Negative, while the rating has been affirmed at 'AA- (rus)' and withdrawn.

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 The region's senior debt National long-term rating has been affirmed at 'AA- (rus)' and withdrawn.

The revision of the Outlooks reflects better-than-expected operating performance, which resulted in a smaller deficit before debt variation and deceleration of debt growth. The affirmation reflects Fitch's baseline scenario that the region will maintain sound operating performance and moderate direct risk.

The National ratings are being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see Fitch Ratings Withdraws National Scale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
The 'BB' ratings reflect the sound budgetary performance of Nizhniy Novgorod Region with a positive operating balance, but also its concentrated maturity profile and ongoing budget deficit. The ratings further take into account a large and diversified local economy, albeit prone to cyclicality.

The rating action reflects the following rating drivers and their relative weights:

High:
Improved Budgetary Performance
In 2016, Nizhniy Novgorod Region's operating balance improved to a sound 11.7% from 6.1% a year earlier. This was driven by a 21% yoy increase in corporate income tax proceeds, mainly from the financial sector amid profit growth from a low base in 2014-2015. Other contributors were excise duties, which rose 28% due to a tariff increase for petrochemicals and an increase in alcohol production, while personal income tax proceeds grew 7.7% yoy amid broad growth of salaries across all sectors. Deficit before debt variation also narrowed to a modest 3.3% in 2016 from 7.5% in 2015.

Fitch forecasts the region will stabilise its operating margin above the historical level of 10% over the medium-term due to an acceleration of tax revenue. Its diversified economy will gain from an economic recovery in Russia. Fitch projects Russia's GDP will return to growth at 1.3% in 2017. We forecast the region's current margin at 7%-8% for 2017-2019, but high interest payments at about 4% of operating revenue will put pressure on the region's ratings. The region will run a modest deficit of 3%-5% over the medium term, leading to broadly stable debt.

Medium:
Debt Growth Deceleration
In 2016 the region's direct risk stabilised at 62.4% of current revenue (2015: 63.5%) while the debt payback ratio significantly improved to 8.3 years from 30.1 years. According to Fitch's baseline scenario, the region's direct risk will stabilise at below 63% of current revenue by 2019, as the administration limits capex following the completion of major capital-intensive projects for Football World Cup 2018.

Refinancing Risk Reduced
The average maturity of the region's debt improved in 2015-2016 to 2.5 years from 1.9 years in 2014. The region reduced the share of bank loans to 30% in February 2017 from 44% in 2015, while the share of bonds increased to 43% from 36% and subsidised budget loans to 27% from 20%. We take a positive view of the change of debt structure, but the region remains under pressure from refinancing risk as most of the bank loans remain short-term revolving facilities.

The maturity profile is concentrated, as 78% of the region's direct risk will mature in 2017-2019. As of 1 February 2017 the region's refinancing needs for this year stood at RUB30.2 billion (41% of outstanding debt), but these are mitigated by RUB41 billion available revolving bank credit facilities and RUB9 billion standby short-term credit facilities from the Federal Treasury. The administration plans to refinance debt via a combination of bank loans, budget loans and RUB12 billion domestic bond placements later this year.

The ratings also consider the following rating factors:

Diversified Local Economy
Nizhniy Novgorod has a diversified economy with a fairly well-developed industrialised sector, supporting wealth metrics near the national median. In 2016 the 10 largest taxpayers contributed 17% of all tax revenues, underlining a broad tax base. The region is among the top 15 Russian regions in gross regional product (GRP) volume and has a population of 3.3 million people (1.7% of Russia's).

Nizhniy Novgorod Region's economy is driven by internal demand and therefore prone to cyclicality and correlated with the national economy. GRP saw mild growth of 0.7% in 2016, which was better than the wider Russian economy (a 0.4% fall). According to the administration's forecast the region's GRP will grow 1% in 2017 and accelerate to 2%-2.5% in 2018-2019, following the national trend.

Weak Institutional Framework
Fitch views the region's credit profile as being constrained by the weak Russian institutional framework for sub-nationals, which has a shorter record of stable development than many of its international peers. The predictability of Russian local and regional governments' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities within government tiers.

RATING SENSITIVITIES
Sound operating performance with an operating margin above 10% on a sustained basis, accompanied by a decrease in direct risk below 40% of current revenue and lower reliance on short-term bank financing, could lead to an upgrade.

An increase in direct risk to above 70% of current revenue, accompanied by ongoing refinancing pressure or an inability to maintain a sustainable positive current balance, could lead to a downgrade.

Company: Nizhniy Novgorod oblast

Full company nameFinance Ministry of Nizhniy Novgorod region
Country of riskRussia
Country of registrationRussia

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