Training on Forecasting, April 7–8

ACRA affirms B(RU) to the Republic of Mordovia, outlook Stable, and B(RU) to bond issues

ACRA has affirmed the credit rating of the Republic of Mordovia (hereinafter, the Republic, or the Region) at B(RU), outlook Stable (the rating previously held the status “Rating under revision: negative”), due to the Region’s high debt load and inability to meet restructuring requirements on budget loans, which led to the repeated restructuring of their debt obligations (the extension of budget enforcement measures). Critical liquidity levels, substantial debt in public sector enterprises, and lower economic indicators compared to national averages all have a negative impact on the Region’s rating. The status “Rating under revision: negative” was withdrawn after the Region signed an agreement with Ministry of Finance of Russia on terms for the extension of budget enforcement measures.

The Republic of Mordovia is part of the Volga Federal District and its population is about 0.8 million people, which is 0.5% of Russia’s total population. In 2017, the Republic’s GRP amounted to RUB 213 bln (0.3% of the total GRP among Russian regions).

Key rating assessment factors

The Region’s inability to meet restructuring conditions did not lead to significant changes in the deadline on budget loan write-offs. In 2018, the Region violated budget loan restructuring terms. The Federal Treasury Department was supposed to write off RUB 20.8 bln in budget enforcement measures from the Region’s accounts, which would have led to the inability to fulfill social commitments and service commercial debt. The Ministry of Finance of Russia prolonged budget enforcement measures with a repayment schedule of 2018-2024. In fact, the repayment deadline for restructuring budget loans has changed only slightly compared to the original terms; the short-term part of the budget loan repayment schedule has increased.

A change in conditions to reduce debt load. In contrast to the budget loan restructuring agreements which entail the reduction of the debt burden with respect to tax and non-tax revenues (TNTR), the extension agreement on budget enforcement measures contains an obligation to reduce the absolute amount of debt. ACRA assesses the probability of executing the debt reduction schedule as low.

The share of mandatory expenditures in the budget structure could grow. ACRA expects the Republic to reduce its budget’s capital expenditures in 2019 due to the execution of government decree № 1268. Capital expenditures could reduce by 40%, and their share in total expenditures could reduce from 20% to 14%. In terms of reducing debt, the Region will need to execute its budget without a deficit, i.e. reduce budget expenses (via a reduction in capital expenditures, as mentioned above). As a result, the share of mandatory expenditures could increase significantly in 2019 compared to 2018 (69% compared to 58%, respectively).

Implementation of liquidity risk. Since September 2018, the Republic has announced 78 purchases of credit funds for a total amount of RUB 15.4 bln. However, it has not been able to raise credit funds due to the lack of banks. Failed auctions indicate the realization of short-term liquidity risk. As of March 1, 2019, funds of previously contracted credit lines covering half of the average monthly budget expenditures are available to the Republic.

The probability of fulfillment on guarantees and the extended debt of public sector enterprises put additional pressure on the rating. Because of the financial condition of the enterprises-principals on the issued guarantees, the Republic of Mordovia cannot expect the planned repayment of guaranteed debt, which could lead to bank collections falling on the Region’s budget. The significant debt of the Region’s public sector enterprises, which is more than half of its own budget revenues, creates risks for the budget.

Key assumptions

  • Execution of the Region’s budget without a deficit in 2019;
  • Reduction in capital expenditures in 2019 and for the period agreed upon with the Ministry of Finance of Russia;
  • Refinancing part of the repayable debt through bank loans;
  • Growth in TNTR in 2019 at rates higher than inflation;
  • Growth in mandatory expenditures in 2019 at rates lower than inflation. 

Potential outlook or rating change factors

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

A positive rating action may be prompted by:

  • Provision of extraordinary support measures to the Region’s budget that have not been taken into account in this revision;
  • Execution of the 2019 budget with a surplus higher than 10% TNTR;
  • Reduction in the risk of supporting public sector enterprises.

A negative rating action may be prompted by:

  • The need for a one-time budget enforcement measure;
  • The inability to establish liquidity to refinance part of the repayable debt. 

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 the 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 for the first time on November 8, 2017.

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 the Republic of Mordovia 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 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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