ACRA affirms BBB-(RU) to the Magadan Region, outlook Stable, and BBB-(RU) to bond issue

The credit rating of the Magadan Region (hereinafter, the Region) is based on the Region’s high share of short-term debt, low economic diversification, and the average operational efficiency of the regional budget. The rating is limited by the Region’s low socioeconomic development and high debt load.

The Magadan Region is located in the Far Eastern Federal District (FEFD) and is part of Russia’s Far North. The Region is home to 0.1% of the Russian population and its GRP accounted for roughly 0.2% of Russia’s aggregate GRP in 2018. The Region produces over 10% of the total gold mined in Russia, and around 60% of the country’s silver.

Key rating assessment factors

Moderately weak budget profile and continued need for debt financing. The Region finished 2019 with a RUB 96 mln budget surplus, which is the equivalent of 0.4% of its tax and non-tax revenues (TNTR). Aggregate TNTR increased by 15% (RUB 2.9 bln), with corporate income tax revenues growing by 20% (RUB 1.2 bln), and personal income tax revenues increasing by 11% (RUB 0.8 bln). Transfers from the federal budget increased by 18% (RUB 2.3 bln) compared to 2018. Budget expenses increased by 12% (RUB 4.1 bln).

The average indicator1 of the regional budget’s operational efficiency was 3% last year (ACRA predicts this indicator will be moderately low in 2020). Although the flexibility of budget expenses is low, this indicator tends to grow. The average share of capital expenses for 2016–2020 will stand at around 6% of total budget expenses (last year it was equal to 5%).

In 2016–2020, the average share of TNTR in income2 (excluding subventions and transfers3 from PJSC RusHydro) will be 65%. The ratio of the modified budget deficit to operating income in 2020 should remain at a minimum negative level. Therefore, if it maintains the current budget parameters, the Region may need to attract a small amount of debt financing. The Region doesn’t expect to record a budget deficit in 2020.

1Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
2Hereinafter, income and expenses do not include subventions and transfers from PJSC RusHydro.
3Transfers sent by PJSC RusHydro in 2017–2020 under the program for achieving basic tariff levels in the regions of the FEFD.

The repayment schedule gives rise to refinancing risks. At the start of 2020, the Region’s debt totaled RUB 14.1 bln and included commercial and budget loans (59% and 34%, respectively), and the Region’s bonds (7%). The debt repayment peak (RUB 5.6 bln or 40% of the debt portfolio) falls in 2021. Most of this debt is made up of bank loans. In 2020, the Region will have to repay or refinance RUB 3.4 bln (24% of its total debt). Given the Region’s tendency to maintain low account balances and its budget parameters, which indicate a surplus will not be achieved this year, ACRA expects the Region to take steps to refinance its debt.

At the end of 2019, the Region’s debt to operating income ratio stood at 39%. ACRA expects this indicator to be around 36% in 2020 and 2021. The Region’s interest expenses are not burdensome: the average level of interest expenses in 2016–2020 will amount to around 2% of total budget expenses.

In 2019, the ratio of debt to internal revenues was 61%, which is in line with the Region’s budget loan refinancing commitments. The Region is required to maintain its debt load at no higher than 67% in 2020. Overdue payables had increased by 13% (to RUB 3.5 bln) as of the end of 2019, which ACRA assesses as negative.

Low budget liquidity. The low liquidity assessment is based on low balances in the Region’s Federal Treasury accounts combined with an insignificant volume of available credit lines with a drawing period of more than a year. As of January 1, 2020, account balances and unused bank limits amounted to no more than RUB 0.4 bln. In the last 18 months, account balances (as of the end of each month) on average amounted to 14% of the monthly expenses of the regional budget. The Region actively uses short-term loans from the Federal Treasury Department to cover cash gaps.

The Region’s economic profile is highly dependent on mining of precious metals.  The mining industry, the Region’s leading sector, accounts for nearly 42% of the regional budget’s tax revenues, according to ACRA’s assessment. In 2019, the five largest taxpayers in the Region all operated in this sector. The average monthly wage to subsistence wage ratio in the Region exceeded 400% in 2015–2018. Historically, the average wage in the Region has exceeded the subsistence wage by more than 3.5x.  However, high prices due to climate and logistics costs offset the effect of this figure for the population. This causes a constant migration outflow; from 2005 to early 2020, the Region’s population has decreased by almost 20%. At the same time, high wages in the Region provide for the collection of comparatively high personal income tax revenues. In 2015–2018, the Region’s average per capita GRP was more than double the national average.

Key assumptions

  • Execution of the budget in 2020 without a deficit while maintaining the current spending parameters;
  • Fulfillment of the Region’s obligations to the Russian Ministry of Finance to reduce its debt load (as per the budget loan restructuring rules).

Potential outlook or rating change factors

The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Stable growth of budget liquidity;
  • Extension of the debt repayment schedule and reduction of debt load coupled with a reduction in the level of overdue payables.

A negative rating action may be prompted by:

  • Growth of debt load without an accompanying extension of the debt repayment schedule;
  • Lower share of internal revenues in the budget;
  • Lower modified budget deficit indicator.

Issue ratings

Magadan Region, 35001 (ISIN RU000A0ZYL48), maturity date: December 25, 2022, issue volume: RUB 1 bln — BBB-(RU).

Rationale. In ACRA’s opinion, the bond of the Magadan Region is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Magadan Region.

Regulatory disclosure

The credit ratings of the Magadan Region and the bond issued by the Magadan Region (ISIN RU000A0ZYL48) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Rating Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.  The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale for the Russian Federation was also used in the process of the credit rating assignment.

The credit ratings of the Magadan Region and the bond issued by the Magadan Region (ISIN RU000A0ZYL48) were published by ACRA for the first time on April 26, 2018.

The credit rating of the Ryazan Region and its outlook and the credit rating of the bond issued by the Magadan Region (ISIN RU000A0ZYL48) are expected to be revised within 182 days following the publication date of this press release in compliance with the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Government of the Magadan Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited and the Government of the Magadan Region participated in the rating process.

No material discrepancies between the provided data and the data officially disclosed by the Magadan Region in its financial statements have been discovered.

ACRA provided no additional services to the Government of the Magadan Region. No conflicts of interest were discovered in the course of credit rating assignment

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