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 based on relatively high economic development, unevenly distributed debt repayment schedule, and limited flexibility of budget expenses.

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

Unevenly distributed debt repayment schedule. The City’s debt load is high: as of the end of 2019, the debt totaled 46% of the current revenues (83% of tax and non-tax revenues, TNTR). A substantial difference is due to a large amount of revenues represented by transfers, which are traditionally typical of municipal budgets. These indicators are estimated to reach 41% and 73%, respectively, by the end of this year.

The debt repayment schedule is uneven due to the regular use of short-term bank loans. As of the beginning of 2020, 53% of the City’s debt obligations comprised short-term bank loans (with a minor share of budget loans). As at the time of the analysis, Nizhny Novgorod had new loan agreements for a term of less than one year; some of the debt has been refinanced as of now. Interest expenses are not burdensome: annual payments are at or below 4% of expenses excluding subventions.

To purchase public transport vehicles, the City usually enters into lease agreements, which can be viewed as indirect debt load. Obligations of municipal enterprises and organizations create no substantial load on the City’s budget.

Average monthly budget account balances of the City were insufficient throughout 2019 to cover its monthly expenses to a significant extent. As of the beginning of 2020, account balances were also not sufficient to cover the debt due in 2020. The City uses funds from the Federal Treasury Department to manage its liquidity; if and when possible, Nizhny Novgorod also replaces borrowings by cheaper funding sources to save on interest expenses.

Limited flexibility of budget expenses due to dependence on transfers. The averaged1 share of TNTR (excluding subventions) for 2016-2020 will equal 67%. The largest contributors of TNTR in the City budget are personal income tax (52% in 2019), property tax (14%), and rental revenues (13%). Since October 2019, 20% of the tax collected as part of the simplified taxation scheme is transferred to the City budget. In view of this fact, revenues from the comprehensive income tax will more than double in 2020 and will be close to the amount of property tax revenues.

1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

As of the end of 2019, the current transactions balance to current revenues ratio totaled 0.08x. The averaged ratio for 2016-2020 will also be 0.08x.

The City’s capital expenditures are traditionally very high, totaling 38% of expenses excluding subventions in the above period; however, higher-level budgets finance the bulk of these expenditures.

Relatively high level of economic development. Nizhny Novgorod is one of the largest industrial centers in the Volga Federal District. The average accrued nominal wage covering all entities in the City is almost four times higher than the subsistence minimum in the Nizhny Novgorod Region. The unemployment calculated according to the ILO methodology is low in the Nizhny Novgorod Region.

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;
  • Raising new loans with longer maturities.

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 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.

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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