OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed the Russian Lipetsk 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 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 Lipetsk region's sound budgetary performance. The Stable Outlook reflects Fitch's opinion that upside and downside risks to the ratings are currently well balanced.

KEY RATING DRIVERS
The ratings reflect the region's moderate direct risk, adequate operating performance and strengthened liquidity. 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 an operating balance of 7%-9% of operating revenue over the medium term, which is in line with 2012-2013 actuals. This will be supported by moderate growth of tax revenue and control of operating expenditure. In 2014, the region demonstrated outstanding performance with an operating balance at 14.4% driven by 22% growth of tax revenue. The region's top taxpayer, OJSC Novolipetsk Steel (BBB-/Negative) is an export-oriented company, which benefited from sharp rouble depreciation in 2H14 and largely contributed to the 42% growth in the region's corporate income tax proceeds in 2014.

Fitch assumes the region will demonstrate a moderate budget deficit in 2015-2017 around 5% of total revenue, which will limit the growth of debt over the medium term. In 2014, the budget was close to balance while the liquidity position strengthened significantly to RUB5.8bn at the beginning of 2015 from RUB1.4bn a year before. The region plans to use part of the accumulated cash reserves to finance the deficit in 2015.

In Fitch's view, the region's direct risk will remain moderate, stabilising at below 50% of current revenue over the medium term (2014: 45.9%). The region's maturity profile is better than most of its national peers, which limits refinancing pressure. Until end-2015 the region has to repay only RUB1.1bn of market debt, which corresponds to 5% of total direct risk. The majority of this amount will be refinanced by a new RUB0.9bn budget loan, which the region will receive in 4Q15, and the remainder will be covered by own resources.

The structure of the region's direct risk favourably changed towards the higher proportion of subsidised medium-term budget loans, which will allow Lipetsk to save on interest payments. In April 2015, the region received a RUB2bn budget loan, which was used to refinance part of the bank loans ahead of schedule. As a result, the proportion of budget loans will be 18% by the beginning of 2016 versus only 3.5% one year earlier. The budget loans have three-year maturity and bear negligible 0.1% annual interest rate.

The region's economy is developed with wealth metrics in line with the national median. The economy is 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.

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

A strong operating balance at about 15% of operating revenue on a sustained basis accompanied by debt coverage (direct risk to current balance) below four years (2014: 4.3 years) could lead to positive rating action.