OREANDA-NEWS. Fitch Ratings has affirmed Russian Chelyabinsk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) 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.

The affirmation reflects Fitch's unchanged baseline scenario regarding Chelyabinsk's satisfactory budgetary performance and strong key credit metrics over the medium term. The Negative Outlook reflects that on the Russian Federation (BBB-/Negative).

KEY RATING DRIVERS

The ratings factor in Chelyabinsk Region's stable operating margin, low debt, sound liquidity and industrialised economy. The ratings also take into account the region's high contingent liabilities and the national economic downturn, which could negatively impact the region's tax base.

Fitch projects Chelyabinsk's operating balance to remain satisfactory at about 7% of operating revenue in 2015 (2014: 7.2%), supported by rising corporate income tax (CIT). Fitch expects CIT to grow 30% in 2015, driven by an improved financials of metallurgical companies, which are the largest taxpayer in the region.

In 2014-1H15, the region's tax revenue was supported by a favourable environment for the Russian steel industry due to sharp rouble depreciation, fall in iron ore prices and large national pipeline projects. Over the medium term tax revenue growth will be constrained by the economic slowdown and weaker prospects of the steel sector amid falling steel prices.

Fitch expects the region to maintain moderate deficit before debt variation close to its historical average, at 3%-5% of total revenue in 2015-2017, as the administration keeps expenditure under strict control. Fitch projects that the region will keep capex at 12%-14% of total expenditure (2014: 15%), thereby limiting direct risk at a low 20% of current revenue over the medium term (2014: 17%).

In September 2015, Chelyabinsk's direct risk accounted for RUB21.9bn (end-2014: RUB18bn) and was 90% composed of bank loans while the remainder was budget loans. The region's liquidity position remained strong and its cash reserves totalled RUB19.3bn at 1 September (end-2014: RUB5.4bn), which covered almost 90% of its direct risk. Fitch forecasts cash will be depleted to RUB5bn at year-end by capital expenditure.

Chelyabinsk's refinancing needs are concentrated in 2016-2017 when 86% of its direct risk matures. The refinancing risk is mitigated by the region's low level of debt and its sound access to bank loans through Sberbank of Russia (BBB-/Negative/F3).

Chelyabinsk's contingent liabilities grew to RUB17.8bn by September 2015 (end-2014: RUB8.8bn) as the region issued guarantees to local agricultural and pipe producers to extend support amid the economic slowdown. Fitch expects gradual amortisation of issued guarantees, and thus stabilisation of net overall risk at below 30% of current revenue by 2017 (end-2014: 22%). So far, no guarantees have been called by lenders.

In 2012, Chelyabinsk issued a RUB3.25bn guarantee for OJSC Southern Urals Civil Construction and Mortgage Corporation's domestic bond due in 2016. Fitch expects the region to continue supporting the company with capital injections and guarantees for new debt, since the entity is 100% owned by the region and plays an important public role in the region.

Chelyabinsk has a developed industrial economy weighted towards the metallurgical and machine-building sectors. This causes the region's revenue to be volatile and dependent on economic cycles. The region's administration projects the local economy to contract 5.7% in 2015 before stagnating in 2016-2018, mirroring the national trend.

RATING SENSITIVITIES
A downgrade of the sovereign or sharp growth of total indebtedness (including contingent liabilities) to above 50% of current revenue or a weak operating balance at below 5% of operating revenue would lead to a downgrade.