OREANDA-NEWS. Fitch Ratings has affirmed Russia's Samara City's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the city's National Long-term rating at 'AA-(rus)' with Stable Outlook.

The affirmation reflects Samara's sound budgetary performance underpinned by a strong and diversified local economy and potential financial support from the Samara Region. It also factors in the city's moderate direct risk, albeit with a high bias to short term bank loans. This exposes the city to a high refinancing risk and makes Samara dependent on access to financial markets in order to refinance maturing debt.

Fitch expects Samara's budgetary performance to stabilize at the current sound level with margins averaging 15% in 2014-2016. According to preliminary data the city's operating balance reached a strong 15.7% of operating revenue in 2013 (2012: 12.5%). A strong operating balance will lead to a high self-financing capacity for capex and will lead to a narrowing of the deficit before debt variation to a low 1%-2% of total revenue in 2014 from 5.4% in 2013. The city administration intends to limit debt growth and budgeted close to a zero fiscal balance for 2015-2016.

Fitch expects the city's direct risk to increase by 7% in 2014 and reach RUB6.5bn. Despite the projected increase, it still remains below a moderate 40% of current revenue. Starting from 2009 the city recorded a continuous deficit caused by capex funding needs. This fuelled a fast direct risk increase albeit from a low base. In 2012 the liabilities of the city's public-sector entities (PSEs) also increased substantially to RUB1.6bn, driven by new loans contracted by the city's water supply and public transport companies.

Samara mostly relies on short-term bank loans for deficit financing, so the city's direct risk stock at end-2013 was 78% composed of bank loans with less than one year to maturity. In 2014 the city needs to repay RUB4.4bn of maturing bank loans and RUB740m budget loans. This is equivalent to 85% of direct risk stock as of 1 January 2014. This exposure to refinancing risk is partially mitigated by revolving credit lines contracted by the city from Sberbank of Russia (BBB/Stable/bbb/F3) and SMP Bank. The lines totalled RUB1.2bn and mature in 2015.

The city is the capital of Samara Region, which has a well-developed diversified economy, based on a strong industrial sector. Local companies' sound economic performance supports Samara's strong fiscal capacity, with taxes that contributed 65% of operating revenue in 2012. The city's administration forecasts continued expansion of the local economy, driven by an average 5% yoy industrial production growth in 2013-2015.

Stabilisation of the overall debt burden, including PSEs' liabilities, below 40% of current revenue and the lengthening of the debt maturity profile coupled with the maintenance of sound budgetary performance in line with Fitch expectation would be positive for the ratings.

Significant deterioration of budgetary performance with the operating margin dropping to 5% coupled with high refinancing pressure from the short-term debt would lead to a downgrade.