Training on sovereign risk credit analysis, October 24

ACRA upgrades the Samara Region to AA-(RU), outlook Stable, and bonds to AA-(RU)

The credit rating of the Samara Region (the Region) has been upgraded based on higher operational budget balance and lower debt service risks. The rating is supported by high budget self-sufficiency. The share of mandatory budget expenditures (as defined in the ACRA methodology) exerts pressure on the rating.

The Region is located in the Volga Federal District and ranks 11th in the Russian Federation by the gross regional product (GRP). The Region’s population is 3.2 mln people.

Key rating assessment factors

Higher operational budget balance. In 2017, for the first time in the last five years, the regional budget was executed with a surplus, which amounted to 1.8% of tax and non-tax revenues (TNTR): budget revenues have grown by 5% (including the 4.2% growth of TNTR), while expenditures have declined slightly (by 0.7%). The operational budget balance has become much higher: the ratio of operational balance to regular revenues has grown from 18.3% (the average figure for 2015–2016) up to 26.7% in 2017.

This year, the positive trends in budget indicators have remained: in the first four months of 2018, TNTR have grown by 11.7% y-o-y, while the expenditures have grown by mere 6.5%. ACRA expects that in 2018, the operational budget balance will remain at the current level.

Better debt load indicators. Growing operational balance has resulted in better proportion of debt service costs and operational budget balance, as well the ratio of operational balance less interest expenses to payables in the current period. The Region has continued to manage successfully temporary free budget balances in order to earn additional income and partially compensate debt service costs.

Comfortable debt repayment schedule. In 1H2018, the Region prepaid bank loans for RUB 10.7 bln (repayment dates: 2018–2021, interest rates: 8.22–8.5%) and placed bonds for RUB 8 bln maturing by 2026 (coupon rate: 7.45%). The prepayment of bank loans and their substitution by less expensive bond debt allows the Region to further decrease its debt service costs and make debt repayment schedule more comfortable for the budget.

Key assumptions

  • In 2018–2019, the Region will comply with budget loans restructuring rules of 2017;
  • The Region will further maintain the proactive liquidity management policy;
  • The 2018 budget will be executed with a deficit of not more than 2.5%.

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:

  • A declining share of mandatory expenditures (as per ACRA methodology) in the regional budget profile;
  • Economic growth indicators (per capita) outpacing the national average.

A negative rating action may be prompted by:

  • A substantially declining share of capex in the regional budget;
  • A decline in the key tax revenues due to deteriorating market conditions and production output.

Issue ratings

The Samara Region, 35009 (ISIN RU000A0JU2H5); maturity date: July 31, 2020, issue volume: RUB 8.3 bln — AA-(RU);

The Samara Region, 35010 (ISIN RU000A0JUQP7); maturity date: July 01, 2021, issue volume: RUB 12.0 bln — AA-(RU);

The Samara Region, 34011 (ISIN RU000A0JVK00); maturity date: June 18, 2020, issue volume: RUB 7.0 bln — AA-(RU);

The Samara Region, 35012 (ISIN RU000A0JWM56); maturity date: June 21, 2024, issue volume: RUB 10.0 bln — AA-(RU);

The Samara Region, 35013 (ISIN RU000A0JXT41); maturity date: May 31, 2024, issue volume: RUB 10.0 bln — AA-(RU);

The Samara Region, 35014 ISIN RU000A0ZZ9P8; maturity date: June 04, 2026, issue volume: RUB 8.0 bln — AA-(RU).

Credit rating rationale. Bonds issued by the Samara Region are a senior unsecured debt, and their credit rating is on par with the rating of the Samara Region.

Regulatory disclosure

The credit ratings were assigned to the Samara Region and the bonds (ISIN RU000A0JU2H5, ISIN RU000A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0JXT41, ISIN RU000A0ZZ9P8) issued by the Samara Region 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. To assign credit ratings to the above bond issues, ACRA also applied the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.

The credits rating assigned to the Samara Region and the government bonds (ISIN RU000A0JXT41, ISIN RU000A0JU2H5, ISIN RU0s00A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0ZZ9P8) issued by the Samara Region were first published by ACRA on December 28, 2016 and July 05, 2017, July 07, 2017, July 07, 2017, July 07, 2017, July 07, 2017, June 06, 2018, respectively. The credits ratings assigned to the Samara Region and the government bonds (ISIN RU000A0JXT41, ISIN RU000A0JU2H5, ISIN RU000A0JUQP7, ISIN RU000A0JVK00, ISIN RU000A0JWM56, ISIN RU000A0ZZ9P8) issued by the Samara Region are expected to be revised within 182 days following the rating action date (June 20, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings are based on the data provided by the Government of the Samara Region, information from publicly available sources (the RF 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 Samara Region participated in their assignment.

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

ACRA provided no additional services to the Government of the Samara Region. No conflicts of interest were discovered in the course of credit rating assignment.

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