Training on Forecasting, April 7–8

ACRA affirms A-(RU) to the Kemerovo Region, outlook Stable, and A-(RU) to bond issue

The credit rating of the Kemerovo Region (hereinafter, the Region) is based on a minimal level of its debt load and excessive budget liquidity. The rating is under pressure of the Region’s low flexibility of budget expenses, low economic diversification and ill-diversified tax revenues, as well as low per capita economic indicators.

The Region is a part of the Siberian Federal District, bordering six other administrative entities of the Russian Federation. The Region’s population is 2.7 million people (1.8% of Russia’s total population). According to the Region’s estimates, its gross regional product (GRP) amounted to RUB 1.13 trillion in 2018 (it makes up nearly 1.2% of the total GRP of Russian regions annually).

Key rating assessment factors

See: "For some – a trade war, for others – profits: Ferrous metals are resisting falling prices, maintaining the creditworthiness of the industry" as of December 17, 2018

Significant increase in tax revenues provided a budget surplus. In 2018, the regional budget surplus amounted to RUB 36.1 billion, or 26.4% of tax and non-tax revenues (TNTR). The budget surplus is due to the persistently favorable prices in the coal market and a temporary change in property taxation, as well as a moderate increase in budget expenditures. In 2018, income tax revenues (make up almost half of the TNTR) increased by 33% year-on-year, property tax revenues (10.5% of the TNTR) rose by 31.5%, and personal income tax revenues grew by 15%. The TNTR increased by 22%, and total revenues by 24%. Meanwhile, the regional budget expenditures rose by just 16.7%.

The size of the Region’s operating balance is volatile due to its dependence on the extractive sector. According to ACRA estimates, the share of tax revenues from the sector amounted to 39% in 2017, and in 2018 it is expected to grow. Despite the fact that the size of the Region’s operating balance amounted to 31% in 2018 (which is estimated as high in accordance with the ACRA methodology), its average value for 2016-2018 was just 21%. Its increase in 2018 is largely due to the growth of tax revenues from the extractive industry. According to the Region’s forecast and that of ACRA, ruble prices for thermal coal will start to decline in 2019. Furthermore, changes in tax legislation will lead to a decrease in property tax revenues. Although the latter factor will be offset to some extent by a partial change in the distribution of some other taxes, the Region’s operating balance will decline to 19% in 2019.

The flexibility of budget expenditures is limited by their structure: the share of mandatory (according to the ACRA methodology) expenditures is high and will average 84% in 2016-2019. The share of capital expenditures does not exceed 11% of total budget expenditures.

Comfortable repayment schedule and low debt service costs. As of January 1, 2019, the Region’s sovereign debt included: 1) bonds (27% of all debt obligations, or RUB 9 billion) repayable in 2021-2024; 2) restructured budget loans (50.9% of all debt obligations, or RUB 17 billion); 3) other debt obligations (22.1% of all debt obligations, or RUB 7.3 billion) repayable by 2035. Given this structure, the debt repayment will amount to 3-6% of the total debt in 2019-2020 annually. As of February 1, 2019, the volume and structure of the debt have remained unchanged.

In 2018, the budget surplus was allocated to fully repay bank loans (RUB 21 billion). Thus, the Region also managed to reduce debt service costs. Additionally, income from the investments of temporarily idle budget funds fully compensates for debt service costs. Despite the availability of free cash (82% of the Region’s total debt as of February 1, 2019), ACRA expects that it will not be used for further debt prepayment due to low debt service costs and the complexity of the bond redemption procedure.

According to ACRA estimates, the debt service costs to operating balance ratio will not exceed 3% in 2019, while the ratio of operating balance, net of interest expenses, to debt repayments will go beyond 3x within the specified period. These debt load indicators are regarded as corresponding to the minimal level of risk in accordance with the ACRA methodology. At the end of 2019, the volume of the Region’s debt will amount to some 1.2x of its operating balance.

Key assumptions

  • Conservative debt policy;
  • Decline in coal prices by nearly 6% per year in 2019-2021;
  • Decline in income tax revenues and property tax revenues by 25% and 40% respectively in 2019.

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:

  • Significant decline in the share of mandatory expenses in the budget;
  • Increase in the Region’s operating balance due to the outperforming growth of revenues over spending;
  • Change in the Region’s socio-economic development parameters (significantly narrowing the gap between its economic indicators and the national average).

A negative rating action may be prompted by:

  • Significant growth of spending amid the fall in the Region’s TNTR, leading to the decline in its operating balance.

Issue ratings

Kemerovo Region, 35002 (ISIN RU000A0ZYB40), maturity date: September 26, 2024, issue volume: RUB 9 billion — A-(RU).

Rationale. ACRA is of the opinion that the above bonds issued by the Kemerovo Region are senior unsecured debt instruments, which credit rating is equal to that of the Kemerovo Region.

Regulatory disclosure

The credit ratings have been assigned to the Kemerovo Region and bonds (ISIN RU000A0ZYB40) issued by the Kemerovo 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. In the course of assigning a credit rating to the bond issue above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit rating assigned to the Kemerovo Region and the credit rating assigned to the government bonds (ISIN RU000A0ZYB40) issued by the Kemerovo Region were first published by ACRA on August 29, 2017, and October 2, 2017, respectively.

The credit rating of the Kemerovo Region and its outlook, as well as the credit rating assigned to the government bonds (ISIN RU000A0ZYB40) issued by the Kemerovo Region are expected to be revised within 182 days following the rating action date (February 20, 2019) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on data provided by the Kemerovo 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 Kemerovo Region Administration participated in their assignment.

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

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

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