OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed Russian Tula 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 Stable Outlook.

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

KEY RATING DRIVERS
The ratings reflect Tula's moderate direct risk, sound operating performance in 2014 and a well-diversified tax base. They also reflect deterioration of the national economic environment, which could put pressure on Tula's budgetary performance over the medium term.

Fitch expects the region will continue to maintain stable budgetary performance over the medium term, with an operating balance at 6%-8% of operating revenue, close to the 2011-2013's average. In 2014 the operating margin peaked at 13.4%, as tax proceeds grew more than 30% yoy. Each of the region's most important taxes, namely corporate income (CIT), excise and personal income (PIT), rose 30% or more in 2014.

A sharp hike in the region's tax proceeds in 2014 was driven by both technical and economic factors. PIT growth was a result of the reallocation of additional tax share to the regional level in compensation for new expenditure responsibilities while excise duty growth was driven by higher excise rates, with major contribution from the subsidiary of one of the country's largest breweries sited in Tula. CIT growth was supported by the expansion of the tax base due to a growing regional economy. Fitch believes this was a one-off development and expects significant deceleration in tax proceeds in 2015 due to a weaker national economy.

Fitch assumes the region will control the budget deficit before debt at around 4% of total revenue per year in 2015-2017 by means of capex limitation. Tula has no plans for new capex beyond complete on-going projects. As a result, Fitch projects capex as a share of total spending to decline to 10%-12% in 2015-2017 from 16%-18% in 2012-2014. Its budget deficit narrowed to 3.3% of total revenue in 2014, supported by a strengthened operating balance, after peaking at 10.8% in 2013.

Tula's direct risk will remain moderate over the medium-term at below 35% of current revenue. The agency expects the debt payback ratio (direct risk to current balance) will return to eight years in 2015-2017 after having improved to 2.4 years in 2014. Direct risk increased in nominal terms to RUB15.9bn in 2014 (2013: RUB13.9bn), but declined in relative terms to 27.3% of current revenue (2013: 30.1%).

The region's short debt maturity profile of under three years creates ongoing refinancing pressure. In 2015 the region has to repay RUB3.25bn of maturing bonds, which corresponds to 20% of total direct risk. The administration plans to refinance the total amount of debt due in 2015 by subsidised federal loans. Federal loans have three-year maturity and bear an annual interest rate of just 0.1%. The region is likely to receive RUB3.3bn of budget loans during the year, which will help to save on interest payments and extend the debt maturity profile.

The regional economy has a well-diversified processing industry. Nevertheless, the region's economic profile is still modest, with GRP per capita below the national median. At the same time, Tula's economic growth has outpaced the national average for three years in a row. In 2014 the regional economy grew 4.5%, significantly outperforming national growth of 0.6%. The administration expects regional economic growth in 2015 to be close to that in 2014. Fitch is less optimistic and expects that Russia's economic contraction - we project 4.5% - in 2015 could lead to a slowdown of the region's economy.

RATING SENSITIVITIES
Maintaining a sustained sound operating balance above 10% of operating revenue, accompanied by debt payback being in line with debt maturity would lead to positive rating action.

Conversely, inability to maintain stable operating performance with an operating margin above 5% resulting in weak debt payback exceeding 10 years could lead to a downgrade.