OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed Russian Novosibirsk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Negative Outlooks, and Short-term foreign currency IDR at 'F3'. 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 bond's ratings have been affirmed at 'BBB-' and 'AA+(rus)'.

KEY RATING DRIVERS
The affirmation reflects the region's moderate direct risk, sound well-diversified economy and recovering operating performance in line with Fitch's base case scenario. The ratings also factor in the continuous debt growth, deteriorating macroeconomic environment and pressure from the sovereign rating (BBB-/Negative), which place a strain on the region's credit profile.

Fitch expects the operating balance will continue to gradually improve to 6%-8% of operating revenue in 2015-2017 supported by moderate revenue growth and continued control of operating expenditure. In 2014, the operating balance improved to 5.1% of operating revenue (2013: 4.4%), which is in line with Fitch's forecast.

Fitch expects the budget deficit before debt to narrow to 6% of total revenue in 2015 (2014: negative 12%) and further on to 3%-4% in 2016-2017 supported by capex limitation. The region plans to complete on-going projects and not initiate new ones. It has also made the decision to postpone the implementation of large infrastructure projects such as expansion of the underground lines and construction of the fourth bridge over the Ob' river to improve transport connectivity.

The agency expects direct risk will remain moderate over the medium term, hovering around 45%-50% by the end-2017. In 2014, direct risk increased to 37.8% of current revenue (2013: 26.7%). The region was among the few national peers, which were able to place domestic bonds in 2H14. A new RUB7bn amortising bond maturing in 2019 helped the region to smooth the maturity profile as it almost entirely replaced short-term bank loans. The region is free from contingent liabilities, which is credit positive.

Nevertheless, Fitch notes that increased rates in the national capital market and a liquidity squeeze could put pressure on the region's debt servicing metrics. Fitch expects interest payments could increase by 1.5x in 2015. This would lead to a weaker debt coverage (direct debt/current balance) ratio. In 2014, debt coverage dropped to nine years (2013: 5.6) and is likely to further erode to above 10 years, putting pressure on the region's debt service capacity.

However, this is mitigated by the region's use of short-term subsidised loans from the federal treasury aimed at liquidity replenishment within the year. As of 1 April 2015, the region had to repay RUB10.8bn of debt, of which RUB9bn is federal budget loans. This is more than 2x covered by unused revolving credit lines with maturity up to five years. Fitch expects the region will draw down funding from banks at the end of the year when short-term budget loans become unavailable. This will help the region save on interest payments.

The regional economy is well-diversified across sectors and companies, which supports the region's wealth metrics above the national median. Gross regional product (GRP) per capita was 114% of the national median in 2013 and the average salary was 6% above the national median in December 2014. GRP increased by 1.3% yoy in 2014 outpacing the weaker national growth of 0.6%.

RATING SENSITIVITIES
Consistently weak budgetary performance leading to a deterioration of debt coverage above 10 years or a sovereign downgrade would lead to negative rating action.