OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed Russian Chelyabinsk Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term IDRs are Negative and the Outlook on the National Long-term rating is Stable.

The agency has also affirmed OJSC Southern Urals Civil Construction and Mortgage Corporation's RUB2.5bn outstanding senior unsecured domestic bonds (ISIN RU000A0JTGC8) at Long-term local currency 'BBB-' and National Long-term 'AA+(rus)'. The bonds are guaranteed by Chelyabinsk Region, which is the company's sole shareholder.

KEY RATING DRIVERS

The ratings reflect Chelyabinsk Region's low debt, sound liquidity and strong economy. However, the ratings also take into account its high contingent liabilities, growing debt and high pressure on budgetary performance. The Negative Outlook reflects the deterioration of the economic environment, which will lead to stagnation of the region's tax revenue.

Fitch expects Chelyabinsk Region's direct risk to remain low at under 25% of current revenue and debt ratios to remain satisfactory in 2015-2017. Direct risk rose to RUB18bn or 17% of current revenue at end-2014, from RUB12bn or 12% a year earlier. Debt coverage by current balance remained strong at about two years at end-2014. Interest paid accounted for less than 1% of operating revenue in 2014.

Chelyabinsk Region has issued guarantees of RUB3.25bn for OJSC Southern Urals Civil Construction and Mortgage Corporation's bond. Fitch expects further growth of issued guarantees due to the region's programme to tackle the economic slowdown by extending support to major companies operating in the region. So far, no guarantees have been called by lenders, but further growth of contingent risk will put pressure on the region's creditworthiness.

The region has low refinancing risks thanks to historically sound liquidity and low debt. It has no maturing debt in 2015, while cash was RUB9.5bn at 1 March 2015. The region has a refinancing peak of RUB9.3bn in 2016, but Fitch does not expect the region to face difficulties in accessing debt markets or rolling over its existing loans with Sberbank of Russia (BBB-/Negative/F3).

Fitch expects the region's budgetary performance to remain satisfactory, but below historical levels. Operating surpluses are likely to be at 5%-6% of operating revenue in 2015-2017 (2014: 7.2%). The region had sound tax revenue growth of 15% year-on-year in 2014 primarily thanks to increased rouble-denominated profits of metals exporters following the depreciation of the Russian currency by more than 40% in 2014.

However, Fitch expects a decline in tax revenue in 2015 by at least 5% due to the national economic slowdown, while the federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure.

Chelyabinsk Region has a sound industrial economy, which supports wealth indicators above the national median. The region is home to well-developed metallurgical and machine-building industries. The tax base is slightly concentrated with the 10 largest taxpayers accounting for about 20%-22% of tax revenue per year in 2013 and 2014.

RATING SENSITIVITIES

A downgrade of the sovereign or sharp growth of total indebtedness to above 50% of current revenue or weak operating surpluses at below 5% of operating revenue would lead to a downgrade.