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ACRA downgrades the Republic of Mordovia and its bonds to B(RU), with the status “Rating under revision: negative”

The credit rating of the Republic of Mordovia (hereinafter, the Republic of Mordovia, the Republic, the Region) has been downgraded on the possible inability of the Republic to pay its debts in case the Federal Treasury continues to debit the Republic's accounts as part of the budget loans enforcement procedure initiated due to the Region's breach of budget loan restructuring agreements. Moreover, ACRA takes into account a sharp decline in the republican budget liquidity, deterioration of budget discipline expected in 2019 and in the forecast period (until 2021), and no chances for one-off debt decrease in 2020 (this scenario was not implemented in 2017, and it is not expected to be implemented in 2018). The rating is also under influence of uncertainty in respect of the deadlines of budget loans enforcement procedure in 2019, as well as a possible grace period in such procedure.

Key rating assessment factors

Implementation of the risk of budget loans enforcement due to Region's breach of the budget loan restructuring conditions. The Republic is in breach of the budget loans restructuring conditions set forth in the supplementary agreements with the RF Ministry of Finance. According to the timeline indicated in the relevant executive orders, the Federal Treasury was expected, in the frames of the budget loans enforcement procedure, to debit the Republic's accounts for RUB 20.48 bln of budget loans (which is 88% of the Republic's own revenues in 2018, according to ACRA estimates). ACRA is not aware of any reasons for enforcement of the complete amount of the restructured debt. The RF Ministry of Finance had already rescheduled some debt enforcement deadlines, which allowed the Republic to avoid the need to repay an amount equal to 15% of the Region's own revenues in 2018. The amount that, according to the new debt enforcement schedule, was to be collected in 2018, was enforced by the Federal Treasury in full. After February 1, 2019, the enforced amount is estimated by ACRA to be 81% of the own budget revenues of the Region in 2019. In case this amount is enforced, the Republic will cease to be able to repay its market debt.

Implementation of the risk of short-term liquidity. Since September 2018, the Republic has announced 83 tenders for loans for the total amount of RUB 16.5 bln (shrinking the loan repayment periods from three years to one year), but no bidders took part in those tenders. This indicates implementation of the Region's short-term liquidity risk in the situation of direct debiting its budget accounts.

Expectation of the next restructuration of the Region's budget debt. In case the current loan enforcement schedule is implemented as planned, the Republic will not be able to perform both its social obligations and other financial obligations (other than budget loans). This may result in the default on its outstanding bonds due in July and September 2019 for the total amount of RUB 2.4 bln, which makes the likelihood of the Republic's default on its debt service obligations high in the short term. In ACRA's opinion, the only way to avoid such event is to extend, not later than February 1, 2019 (the date of the next direct debit), the budget loan enforcement deadlines. ACRA is of the opinion that, in case the Republic is late in extending the deadline of the budget loan enforcement procedure, the RF Ministry of Finance, as a key creditor, will reschedule the repayment deadlines.

No prospects for reducing the debt load. In 2018, the Region's debt may grow by 9%, while the draft 2019 budget indicates no perceptible decrease in the debt. In 2020, the debt load is planned to reduce on account of the source "Shares and other forms of equity" amounting to RUB 23.5 bln (in 2017, the Republic failed to perform allocations on this group of sources for the amount of RUB 19.7 bln and in 2018, as expected by ACRA, it will also fail to do so for the amount of RUB 28.5 bln). The debt of state-owned enterprises in the Region is about RUB 15 bln (about 60% of own budget revenues), and the amount of overdue receivables of the budget, according to the last data from the Region, is about RUB 0.5 bln.

Key assumptions

  • In early 2019, the budget loan enforcement deadline will be extended;
  • The Republic will manage to raise loans in order to overcome the liquidity crisis.

Potential outlook or rating change factors 

The status “Rating under revision: negative” assumes with maximum possible probability a change in the rating within the short-term 90-days horizon.

Removal of status and downgrading of the credit rating may be prompted by:

  • Failure to agree the extension of the budget loan enforcement procedure.

Removal of status and confirmation of the credit rating at the current level may be prompted by:

  • Extension of the budget loan enforcement procedure for five years;
  • Extraordinary support to the Republic’s budget that has not been taken into account in this revision.

Issue ratings

Republic of Mordovia Government Bond, 2015 (ISIN RU000A0JVV49), maturity date: October 14, 2020, issue volume: RUB 3 bln — B(RU);

Republic of Mordovia Government Bond, 2016 (ISIN RU000A0JWSQ7), maturity date: September 3, 2021, issue volume: RUB 5 bln — B(RU).

Credit rating rationale. The above listed bond issues of the Republic of Mordovia, in ACRA’s opinion, are senior unsecured instruments, and their credit rating is equal to the rating assigned to the Republic of Mordovia – B(RU).

Regulatory disclosure

The credit ratings have been assigned to the Republic of Mordovia and the bonds (RU000A0JVV49, RU000A0JWSQ7) issued by the Republic of Mordovia 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. In the process of credit rating assignment to the above issues, 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 Republic of Mordovia and the credit ratings of the bonds (RU000A0JVV49, RU000A0JWSQ7) issued by the Republic of Mordovia were published by ACRA on November 8, 2017, for the first time.

The credit rating of the Republic of Mordovia and its outlook as well as the credit ratings of the bonds (ISIN RU000A0JVV49, RU000A0JWSQ7) issued by f the Republic of Mordovia are expected to be revised within 90 days after the rating action date (December 17, 2018) 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 Republic of Mordovia, 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 Republic of Mordovia participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by the Republic of Mordovia in its financial statements have been discovered.

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

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