ACRA affirms BBB+(RU) to the Tambov Region, changes outlook to Stable, and affirms bonds issues at BBB+(RU)

ACRA has changed the outlook on the credit rating of the Tambov Region (hereinafter, the Region) based on the low growth rates of the regional budget’s tax and non-tax revenues (TNTR). This does not allow the Region to reduce its relative debt load, assuming growth in budget expenses. The Region’s credit rating is based on average budget discipline and control, as well as a relatively high debt load with a low risk of refinancing. The regional economy’s focus on agriculture limits the growth of budget revenues as well as socio-economic development, which puts pressure on the credit rating.

The Tambov Region is located in the Central Federal District and is home to slightly less than 1% of Russia’s population. The Region accounts for about 0.5% of the country’s total GRP and in 2018, its GRP amounted to approximately RUB 323.8 bln. Agriculture (farming and food manufacturing) generates one third of the Region’s GRP.

Key rating assessment factor

Limited opportunities to generate internal budget revenues. The Region's internal revenues (excluding subventions) should average 57% for 2017-2020, indicating a medium level of budget self-sufficiency. Although capital expenses account for a significant proportion of total budget expenses (16% on average for 2017-2020), transfers from the federal budget finance more than half of them annually, meaning that they cannot be used as reserves for budget cuts. According to ACRA, the structure of expenses is not flexible, as expense items account for more than 70% of the regional budget on an annual basis. In fact, this figure is even higher given the high share of co-financing on capital expenses by the federal budget. The regional budget’s tax revenues are well diversified, although in related industries – agriculture and agricultural processing – there is slight concentration in the tax base. The combined share of these sectors in GRP and in tax revenues is about one-third and 15%, respectively, on average over the past three years. The relatively narrow tax base and wage dynamics limit the further growth of the regional budget’s tax revenues, as personal income tax is the most significant tax in the TNTR structure. The low growth rates of internal revenues and the lack of opportunities to significantly reduce expenses do not allow the Region to balance its budget without a deficit and, as a result, it cannot reduce its debt load. Given the current budget parameters, the amount of non-target transfers should decrease for 2019, meaning that the Region will have fewer opportunities to use such funds at its own disposal compared to 2018.

Possible violation of the budget loan restructuring agreement in 2019 and low refinancing risk. The absolute size of the Region’s debt continues to grow and at the end of this year, according to ACRA, the debt to TNTR ratio could exceed the limits specified in the budget loan restructuring agreement. According to ACRA, this would mean that approximately 4% of the Region’s total debt would be subject to refinancing, which is not critical for the regional budget given its debt repayment schedule.

Bonds and long-term budget loans accounted for about 70% of the Region's debt as of November 1, 2019. This determines the uniformity of the repayment schedule and the low refinancing risk in the medium term. The maximum share of debt to be refinanced will come in 2022 and amounts to 25%.

Key assumptions

  • Continued dependence on transfers for budget revenues;
  • Controlling budget expense increases while maintaining mandatory expenses within 75%;
  • Possible increase in relative debt load.

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:

  • Increased self-sufficiency in the regional budget;
  • Increased operating balance;
  • Increased liquidity.

A negative rating action may be prompted by:

  • Growth in mandatory expenses;
  • Growth in debt load higher than ACRA’s projected figures;
  • Change in the debt repayment schedule (i.e., increase in the share of short-term financing sources).

Issue ratings

Tambov Region Government Bond, 35002, (ISIN RU000A0JWT75); maturity date: September 20, 2023; issue volume: RUB 1.6 bln – BBB+(RU).

Tambov Region Government Bond, 35003, (ISIN RU000A0JXVH8); maturity date: July 12, 2024; issue volume: RUB 3.5 bln – BBB+(RU).

Tambov Region Government Bond, 35004, (ISIN RU000A0ZYJ18); maturity date: December 5, 2025; issue volume: RUB 3 bln – BBB+(RU).

Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Tambov Region.

Regulatory disclosure

The credit ratings of the Tambov Region and bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) have been 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 the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In the course of assigning credit ratings 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 has also been used.

The credit ratings assigned to the Tambov Region and the bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) were first published by ACRA on July 3, 2017, July 14, 2017, July 11, 2017, and December 13, 2017, respectively. The credit ratings assigned to the Tambov Region and the bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) 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 are based on the data provided by the Tambov Region, information from publicly available sources (Ministry of Finance, Federal State Statistics Service, and Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Tambov Region Administration participated in their assignment.

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

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

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