OREANDA-NEWS. March 30, 2015. Ratings has affirmed Russian Lipetsk Region'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 region's National Long-term rating at 'AA-(rus)' with a Stable Outlook.

The region's outstanding senior unsecured domestic bonds' ratings have been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The ratings reflect the region's moderate direct risk, sound operating performance in 2014 and strong regional economy. They also take into account the high concentration of the regional economy in ferrous metallurgy, which makes Lipetsk dependent on the fluctuations in the steel market, leading to volatile tax revenue.

Fitch expects the region will maintain satisfactory budgetary performance over the medium-term. The operating balance will be around 10% of operating revenue in 2015-2017, supported by control over operating expenditure and moderate growth of operating revenue. In 2014 the region demonstrated outstanding performance with an operating balance at 14.4% of operating revenue (2013: 5.9%) and budget deficit before debt at 0.2% of total revenue (2013: 13.5%), driven by an impressive 21% growth of operating revenue. Fitch believes that the exceptional results were driven by external factors, which are unlikely to be repeated over the medium-term.

Lipetsk's corporate income tax (CIT) increased 43% in 2014 as profits of the region's largest taxpayer OJSC Novolipetsk Steel (NLMK, BBB-/Negative) grew substantially, contributing 35% to the region's taxes. NLMK, which is one of the largest Russian steel producers, benefitted from the sharp rouble depreciation last year as around 80% of its revenue is denominated in foreign currency (mostly dollars and euros). Fitch expects CIT to decline by 10% or more in 2015 after the high proceeds last year, although this will be tempered by moderate growth of other taxes and current transfers.

Fitch assumes the budget deficit before debt will widen in 2015 from its exceptionally low level in 2014, but will remain moderate at 5%-6% of total revenue over the medium term. The administration will continue to control growth of operating and capital expenditure, as part of prudent financial management. Fitch expects capex as a share of total spending will decline on average to 15% per year in 2015-2017 versus 21% in 2012-2014.

In Fitch's view the region's direct risk will remain moderate over the medium term, not exceeding 50% of current revenue. In 2014 direct risk accounted for 45.9% of current revenue, up from 41.4% in 2013. The region's maturity profile is stronger than for most of its national peers. Direct risk is dominated by medium-term bank loans and issued debt with amortising repayments, providing a smooth maturity profile until 2020, with a small amount of budget loans to be repaid in 2023-2032.

Fitch estimates the region's refinancing risk as moderate. In 2015 the region has to repay RUB4.3bn, which corresponds to 24% of total direct risk. Part of the debt will be refinanced by RUB2bn federal budget loans, which the region will receive during 2015. The budget loans have three-year maturity and bear 0.1% annual interest rates, thus allowing the region to support a medium term debt profile and to save on interest costs. The remaining debt obligations due in 2015 will be covered by committed credit lines and accumulated liquidity.

The region's economy is developed but concentrated in ferrous metallurgy, which contributed 58% of the region's industrial output in 2014, making it vulnerable to fluctuations in the domestic and international steel markets and contributing to the volatility of the region's taxes. In 2014 the regional economy grew 1% yoy according to preliminary data, which is only marginally better the national weak growth of 0.6%.

RATING SENSITIVITIES
Widening deficit before debt variation leading to an increase in direct risk to above 60% of current revenue could lead to a negative rating action.

Maintenance of strong operating performance above Fitch expectations on a sustained basis accompanied by debt coverage (direct risk to current balance) below four years (2014: 4.3 years) would lead to positive rating action.