ACRA affirms A-(RU) to Nizhny Novgorod, outlook Stable, and A-(RU) to bond issue

The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is due to its high debt load, effective liquidity management, the relatively low flexibility of budget expenses (the share of capital expenses is high due to support from higher-level budgets), and relatively high economic indicators.

Nizhny Novgorod is the administrative center of the Nizhny Novgorod Region and the Volga Federal District. It is Russia’s fifth largest city, with a population of over 1.25 million. Nizhny Novgorod is a major transportation hub of the Volga Federal District and one of Russia’s largest industrial centers.

Key rating assessment factors

High debt load and irregular debt repayment schedule. The City’s debt load is high; ACRA estimates the debt to operating balance ratio to be 2.7 by the end of 2019. The City’s debt to proprietary revenues ratio should not exceed 80%. Although obligations on vehicle leasing contracts contribute to the debt burden, the objectives of this financing partially mitigate the negative impact of this factor. The debt repayment schedule is uneven due to the regular use of short-term bank loans. From October 1, 2019 until the end of the year, the City has to repay (refinance) 13% of its debt, the majority of which is a loan from the Federal Treasury Department. In 2020, 41% of current debt is scheduled to be repaid, primarily bank loans. Nizhny Novgorod’s debt policy involves the city refinancing a significant part of its debt annually. As a result, the operating balance (excluding interest expenses) does not exceed debt repayment and is estimated to be at 0.6 by the end of 2019. Effective liquidity management largely offsets this factor.

Limited flexibility of budget expenses due to dependence on transfers. The City’s proprietary revenues1 (excluding subventions) are relatively high, averaging 64% in 2016–2019. Mandatory expenses account for a significant share of budget expenses (77% in the aforementioned period), which prevents the City from managing expenses and limits the operating balance. Despite the fact that the City’s capital expenses are at an average of 23%, they are not flexible because they are largely (75% in the analyzed period) financed by transfers from higher-level budgets. If the share of current expenses increases, ACRA expects this budget discipline assessment factor to be offset by an increase in proprietary revenues as transfers covering capital expenses decrease. The City’s operating balance is moderate at 17% of regular revenue.

Part of the City’s proprietary revenues is from a source regulated by regional legislation, according to which 3% of personal income tax paid into the regional budget is redistributed to the budgets of the City’s districts.

Key assumptions

  • Stable budget policy of the Nizhny Novgorod Region in terms of income tax revenue;
  • Potential decrease in capital expenses along with a decrease in the transfers that cover them;
  • Further conclusion of leasing contracts to finance the development of the City’s transport infrastructure.

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:

  • Higher tax revenues caused by an increase in the tax base that is not accompanied by a corresponding increase in mandatory expenses;
  • Lower mandatory expenses while maintaining the current level of tax revenues;
  • Longer maturities on borrowed funds and a smoother repayment schedule.

A negative rating action may be prompted by:

  • Lower budget self-sufficiency caused by a proprietary revenue shortage;
  • Changes in regional legislation (i.e. redistribution of personal income tax revenues in favor of the Nizhny Novgorod Region);
  • Higher interest expenses relative to the City’s operating balance;
  • Higher debt load.

Issue ratings

Nizhny Novgorod, 34002 (ISIN RU000A0ZYJ00), maturity date: December 5, 2022, issue volume: RUB 5 bln — A-(RU).

Rationale. In ACRA’s opinion, the bond listed above is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of Nizhny Novgorod — A-(RU).

Regulatory disclosure

The credit ratings were assigned to Nizhny Novgorod and the bond issued by Nizhny Novgorod (RU000A0ZYJ00) 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 issue, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings of Nizhny Novgorod and the bond issued by Nizhny Novgorod (RU000A0ZYJ00) were published by ACRA for the first time on November 21, 2017, and November 29, 2017, respectively.

The credit rating of Nizhny Novgorod and its outlook, as well as the credit rating of the bond issued by Nizhny Novgorod (RU000A0ZYJ00), 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 data provided by Nizhny Novgorod, 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 Administration of Nizhny Novgorod participated in their assignment.

Disclosure of deviations from methodologies: the average nominal wage was used to estimate the monetary income of the City’s population because statistical data on per capita monetary income for municipal entities was not available.

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

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

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