Training on sovereign risk credit analysis, October 24

ACRA changes outlook of the Samara Region to Positive, affirms credit rating and bond issues at AA-(RU)

The credit rating outlook on the Samara Region (the Region) has been changed on higher tax revenues and the expected decline in the debt load. The credit rating is based on the good balance and very high liquidity of the regional budget. The rating is limited by socio-economic indicators, some of which lag behind the Russian averages, as well as by the high level of mandatory (as per the ACRA methodology) budget expenses.

The Region is located in the Volga Federal District and ranks 11th in the Russian Federation by the gross regional product (GRP). The Region’s population is 3.2 mln people.

Key rating assessment factors

Outperforming growth of the Region's own revenues. ACRA expects that in 2018, the Region's budget will be executed with a 2–4% surplus of tax and non-tax revenues (TNTR) due to the growth of TNTR outperforming the growth rate of expenditures. The key contributor to the TNTR will be profit tax, which, according to the forecast, will grow by not less than 15% against 2017. In 2018, the corporate property tax revenues will grow by more than 20%. In 9M2018, the most significant increase in the TNTR was demonstrated by the following sectors: mineral extraction, chemicals, motor vehicle manufacture, and financial sector. It is expected that the growing TNTR will drive the regional budget balance up, as the share of own revenues (less subventions) will grow by 2%, and the operational balance will amount to about 28% of regular revenues.

Lower debt load. In ACRA's opinion, the 2018 budget surplus will be applied by the Region to push down the debt load. It is expected that by late 2018, the debt to operational balance ratio will be 125% and the debt to TNTR ratio will not exceed 40% (according to the conditions for restructuration, the year-end target should not exceed 51%). According to the debt repayment schedule of the Region, the annual repayment (refinance) amount of the current volume of debt does not exceed 15% (not more than RUB 8.6 bln). By the end of 2018, the Region's debt will consist of bonds (two thirds) and budget loans (almost one third). Interest expenses on the debt are not burdensome. It is likely that in 2019, the debt load may remain at the level achieved in 2018, provided that the Region will strictly control the growth of mandatory expenditures.

The Region applies temporary free budget funds to get extra revenue and to cover some debt service costs. In 2H2018, the average amount of the Region's deposits was comparable with the monthly average budget expenditures.

Key assumptions

  • In 2018, the regional budget surplus will amount to 2–4% of TNTR;
  • The Region will strictly control the growth of mandatory expenditures in 2019

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely be changed within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • application of regional budget surplus funds to push down the debt load;
  • further decline in the debt load amid stable budget discipline and control indicators in 2019.

A negative rating action may be prompted by:

  • lower budget revenues coming from the key taxes, due to deteriorating market conditions and shrinking industry output;
  • a shrink in the development budget (capital expenditures).

Issue ratings

The Samara Region, 35009 (ISIN RU000A0JU2H5); maturity date: July 31, 2020, issue volume: RUB 8.3 bln — AA-(RU).

The Samara Region, 35010 (ISIN RU000A0JUQP7); maturity date: July 01, 2021, issue volume: RUB 12.0 bln — AA-(RU).

The Samara Region, 34011 (ISIN RU000A0JVK00); maturity date: June 18, 2020, issue volume: RUB 7.0 bln — AA-(RU).

The Samara Region, 35012 (ISIN RU000A0JWM56); maturity date: June 21, 2024, issue volume: RUB 10.0 bln — AA-(RU).

The Samara Region, 35013 (ISIN RU000A0JXT41); maturity date: May 31, 2024, issue volume: RUB 10.0 bln — AA-(RU).

The Samara Region, 35014 ISIN RU000A0ZZ9P8; maturity date: June 04, 2026, issue volume: RUB 8.0 bln — AA-(RU).

Credit rating rationale. The above bonds issued by the Samara Region are a senior unsecured debt, and their credit rating is on par with the rating of the Samara Region.

Regulatory disclosure

The credit ratings were assigned to the Samara Region and the bonds (ISIN RU000A0JU2H5, ISIN RU000A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0JXT41, ISIN RU000A0ZZ9P8) issued by the Samara Region 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. To assign credit ratings to the above bond issues, ACRA also applied the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.

The credits rating assigned to the Samara Region and the government bonds (ISIN RU000A0JXT41, ISIN RU000A0JU2H5, ISIN RU000A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0ZZ9P8) issued by the Samara Region were first published by ACRA on December 28, 2016 and July 05, 2017, July 07, 2017, July 07, 2017, July 07, 2017, July 07, 2017, June 06, 2018, respectively. The credits ratings assigned to the Samara Region and the government bonds (ISIN RU000A0JXT41, ISIN RU000A0JU2H5, ISIN RU000A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0ZZ9P8) issued by the Samara Region are expected to be revised within 182 days following the rating action date (December 19, 2018) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings are based on the data provided by the Government of the Samara Region, information from publicly available sources (the RF 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 Samara Region participated in their assignment.

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

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

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