OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed the Russian Tula Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB', Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term IDRs and National Long-term rating are Stable.

The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BB' and National Long-term 'AA-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Tula region's budgetary performance. The Stable Outlook reflects Fitch's opinion that operating balance and direct risk will be commensurate with 'BB' ratings in the medium term.

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

Fitch expects the region will record stable budgetary performance over the medium term, with an operating balance around 10% of operating revenue. The agency assumes that deceleration of some taxes in 2015 (most importantly, excises and personal income tax) will be off-set by growth of corporate income tax. This will be accompanied by control over opex. In 2014 the region's operating balance peaked at a one-off of 13.4%, as tax proceeds grew by an exceptionally high 30% yoy.

Fitch assumes the region will control the budget deficit before debt at around 3%-5% of total revenue per year in 2015-2017 through limiting capex and continuing cost-efficiency measures. The budget deficit narrowed to 3.3% of total revenue in 2014 from a high 10.8% a year before, supported by a strengthened operating balance.

Tula's direct risk will remain moderate over the medium term at below 35% of current revenue (in 2014: 27.3%). As of 1 September 2015, direct risk totalled RUB15.8bn remaining almost unchanged since the beginning of the year. While the debt portfolio is dominated by market debt as bank loans and issued debt accounted for 77% of total direct risk at 1 August, Fitch expects the proportion of subsidised budget loans will increase to around 22% by end-2015 from 13% one year before.

In April 2015 the region received RUB1.625bn of budget loans, which it used to refinance half of the market debt due in 2015. In September-October 2015 the region will receive another RUB1bn budget loan from the federal government.

The region plans to issue new RUB5bn amortising domestic bond in 4Q15 with four to five years maturity. If successfully placed the new bond will shift refinancing pressure from 2016, when the region has to redeem RUB6.7bn of market debt (42% of the region's total direct risk) and will lengthen the average direct risk maturity profile to three years.

The regional economy has a well-diversified processing industry. Nevertheless, the region's economic profile is modest, with GRP per capita at 88% of the national median in 2013. 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 5.1%, significantly outperforming the national growth of 0.6%. Fitch projects the national economy will contract by 3.5% in 2015, which could lead to a slowdown of the region's economy.

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

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