Training on sovereign risk credit analysis, October 24

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

The credit rating of the Sverdlovsk Region (hereinafter, the Region) is based on moderate debt load and high budget liquidity. The rating is limited by the low share of operating balance in regular income, the high share of mandatory expenses in the budget, and average levels of socioeconomic development in the Region.

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 people. According to the Region, its GRP amounted to RUB 2.2 trln in 2018.

Key rating assessment factors

High levels of liquidity allow the Region to maintain its debt load in the case of a budget deficit. The Region finished 2018 with a budget surplus of 3.6% in tax and non-tax revenues (TNTR), which amounted to around RUB 8 bln. Account balances at the start of 2019 amounted to RUB 17.6 bln. As of August 1, 2019, the Region’s account balances equaled RUB 16.4 bln, of which RUB 11 bln were in bank deposits. The Region’s saved funds and liquidity would allow it to partially finance a possible deficit in 2019, which, according to the budget law, would amount to RUB 14.2 bln (6% TNTR). As of August 1, 2019, the Region’s account balances cover almost all of the debt remaining in 2019 as well as in 2020-2021.

The Region’s debt loan reflects a comparatively low risk level. In 2018, the Region’s relative debt load reduced almost twofold to 1.3x due to an increase in operating balance, an increase in budget income, and a reduction in absolute debt by 3.7%. ACRA predicts an increase in the Region’s relative debt load to 1.8-2x by the end of 2019 due to a decrease in the operating balance, as a decrease in income tax revenues from companies in the metallurgical sector is possible. From 2015 to 2018, on average, revenues from enterprises processing ferrous and non-ferrous metal accounted for 25% of the income tax. As a result, the Region’s operating balance could reduce to 13% of regular income by the end of the year, which would lead to a deterioration in the debt load.

The operating balance (minus interest expenses) to debt ratio in 2019 should continue to be low risk, despite its possible decrease to 3.8x by the end of the year. Debt servicing expenses are not burdensome, despite an increase from 5% in 2018 to 14% of the operating balance in 2019.

As of August 1, 2019, the Region’s debt reduced by RUB 12 bln and equaled RUB 60.7 bln. The debt is made up of almost equal parts bonds, bank loans, and budget loans. Issued guarantees account for less than 2% of the debt. The risk of refinancing is minimal.

Budget indicators reflect the low flexibility of expenses. Mandatory expenses are very high and, according to ACRA, have averaged 81% from 2016 to 2019. As a result, the average ratio of operating balance to regular income should equal 16%, which is below average according to ACRA’s methodology. The budget’s capital expenses average 13% for 2016-2019.

Certain socioeconomic indicators demonstrate growth. Unemployment decreased by 13% in 2018 and stood at 4.8% (according to ILO methodology), which is in line with the national average. Per capita income in the Region averaged 114% of the national average from 2015 to 2018. By the end of 2018, per capita income had increased by 8%. Manufacturing accounts for the majority of GRP (for 2015-2017), while the metallurgical industry generates the majority of tax revenues for the Region (17% on average for 2015-2018).

Key assumptions

  • Reduced metal prices in 2019 as well as reduced tax revenues from the metallurgical industry;
  • Financing a possible deficit in 2019 primarily with liquidity;
  • Conservative debt policy. 

Potential outlook or rating change factors

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

A positive rating action may be prompted by:

  • Decrease in mandatory expenses;
  • 2019 TNTR levels equal to 2018; 
  • Decrease in absolute debt by the end of 2019.

A negative rating action may be prompted by:

  • Executing the 2019 budget with a deficit higher than 6% TNTR;
  • Decrease in revenues on income tax with the need to reduce mandatory expenses.

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).

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

Regulatory disclosure

The credit ratings of the Sverdlovsk Region and bonds (ISIN RU000A0JWZ77, ISIN RU000A0ZYDU3, RU000A0ZZQH9) issued by the Sverdlovsk Region 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 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) issued by the Sverdlovsk Region were first published by ACRA on September 8, 2017, October 24, 2017, October 24, 2017, and October 18, 2018, respectively. The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9) 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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