ACRA affirms A+(RU) to the Sverdlovsk Region, outlook Stable, and A+(RU) to bond issues

The credit rating of the Sverdlovsk Region (hereinafter, the Region) is based on the Region’s strong economic profile, as well as a stable budget profile with a high share of internal revenues and a growing share of capital expenses in the budget.

The Region’s growing debt load and low liquidity limit the rating. However, the Region’s debt repayment schedule does not create refinancing risks.

The Sverdlovsk Region is part of the Urals Federal District, bordering seven other administrative entities of the Russian Federation. The Region’s population is about 4.3 million (3% of Russia’s total population). According to the Region’s government, its GRP amounted to RUB 2.4 tln in 2019 (the Region’s GRP has been consistently around 3% of the total GRP generated by the Russian regions).

Key rating assessment factors

The Region’s economic profile features moderate concentration on the metals sector. The Region’s averaged1 GRP per capita consistently equals 95% of the national average. The ratio of averaged wages to the minimum subsistence level exceeded 3x in 2016-2019. These two factors combined (GRP and wages) indicate that the economic profile of the Region qualifies for the second category at the initial assessment stage.

 

1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regional and Municipal Authorities of the Russian Federation.

In 2019, the unemployment in the Region averaged for the last four years and calculated according to the WLO methodology equaled 4.7%.

The processing industry, with moderate concentration on the metals sector, forms the core of the Region’s economy. Of the Region’s top twenty companies in terms of revenue in 2018, fifteen were involved in metalworking. However, ACRA assesses the net share of the metals industry in the Region’s total tax revenues at 21% for 2017-2019. According to ACRA’s Methodology, the final assessment of the Region’s economic profile corresponds to the second category.

The Region’s debt load is growing, but its debt repayment schedule mitigates the refinancing risks. Debt to current revenue equaled 0.32x in 2019. According to ACRA, this ratio should be 0.41x by the end of 2020. As of July 1, 2020, the Region’s public debt had increased by 24.6% compared to the beginning of the year and totaled RUB 96.2 bln. The debt mostly includes market borrowings including bonds (36.4%) and commercial loans (27.3%). Budget loans accounted for 35.2% of total debt while a Federal Treasury loan accounted for 15.6% and guarantees for 1.1%. Averaged interest expenses should be around 1.7% of total budget expenses excluding subventions in 2016-2020.

The debt repayment schedule shows that the Region will repay or refinance around 18% of its debt on average each year from 2020 to 2024, indicating no refinancing risk.

In any case, the debt load of municipalities continues to decrease. The total debt to total tax and non-tax revenues (TNTR) ratio of the municipalities dropped from 13% in 2016 to 6% in 2019. In absolute numbers, municipal debt declined by RUB 2.4 bln in the abovementioned period to RUB 4.1 bln.

Self-sufficient budget with a high share of capital expenses. The Region’s budget is characterized by a high share of internal revenues, which stood at around 90% of total budget revenues for 2016-2019. Due to the expected growth of transfers by a quarter compared to last year, this figure should decrease in 2020. The averaged share of capital expenses in budget expenses, excluding subventions, increased from 10% to 14% for 2017-2019. This ratio is expected to continue growing in 2020.

The modified budget deficit to current income was slightly negative for the most part in 2016-2019, which points to a minor need to raise debt in order to refinance capital expenses.

According to the information on budget performance, the averaged operating efficiency of the Region’s budget was 12.1% for 2016-2019. The decline in business activity in 2020 associated with the coronavirus pandemic will lead to a reduction in tax revenues. For five months of this year, income tax revenues decreased by 21.5%, total income tax revenues by 12.2%, and property tax revenues by 7.8% (compared to the same period last year). As a result, ACRA expects the budget’s TNTR to decrease by 17% in 2020 and operating efficiency to decrease to 8.4%. The averaged value of the latter should be 11.0% for 2017-2021.

A stable tax revenue structure together with flexibility in budget expenses will support the budget amid declining revenues.

Moderate amount of liquidity. During 2019, account balances at the end of the month averaged more than half of the budget’s monthly expenses. As of July 1, 2020, accumulated liquidity covered 13% of the Region’s total debt.

ACRA expects that the funds available as of July 1, 2020, in the amount of RUB 12.7 bln will be used to finance future deficits, as well as to repay the Federal Treasury loan received in 2020.

Key assumptions

  • Debt increase below 19% in 2020;
  • Maintaining socio-economic indicators at their current levels;
  • Decreasing budget expenses relative to planned figures if TNTR decreases.

Potential outlook or rating change factors

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

A positive rating action may be prompted by:

  • Improved economic profile;
  • Increase in available liquidity;
  • Reduced debt load.

A negative rating action may be prompted by:

  • Increase in budget expenses with a decrease in TNTR in total revenues (excluding subventions);
  • Increase in short-term debt with a decrease in debt quality.

Issue ratings

Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — А+(RU).

Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — А+(RU).

Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — А+(RU).

Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, volume: RUB 5 bln — А+(RU).

Sverdlovsk Region, 34007 (ISIN RU000A101UG7), maturity date: June 28, 2025, volume: RUB 10 bln — А+(RU).

Sverdlovsk Region, 35008 (ISIN RU000A101Z17), maturity date: July 29, 2027, volume: RUB 12 bln — А+(RU).

Rationale.  In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of Sverdlovsk Region.

Regulatory disclosure

The credit ratings of the Sverdlovsk Region and bonds issued by the Sverdlovsk Region  (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7,  RU000A101Z17) were assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings 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. Over the course of the credit rating assignment to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also used.

The credit rating of the Sverdlovsk Region and the credit ratings of the government bonds (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7,  RU000A101Z17) issued by the Sverdlovsk Region were first published by ACRA on September 8, 2017, October 24, 2017, October 24, 2017, October 18, 2018, December 11, 2019, June 29, 2020, and July 24, 2020, respectively. The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7,  RU000A101Z17) issued by the Sverdlovsk Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Sverdlovsk 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 Sverdlovsk Regional Government participated in the rating process.

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

ACRA provided no additional services to the Sverdlovsk Regional Government. No conflicts of interest were discovered in the course of credit rating process.

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