OREANDA-NEWS. Fitch Ratings has affirmed the Russian Kemerovo Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)'. The Outlooks on the Long-term ratings are Stable.

Fitch has also affirmed the region's senior unsecured debt at Long-term local currency 'BB-' and at National Long-term 'A+(rus)'.

The affirmation reflects Fitch's unchanged base line scenario regarding the region's marginally positive operating balance and gradually growing direct risk, in line with the region's ratings.

KEY RATING DRIVERS

The 'BB-' rating reflects the region's volatile budgetary performance and high deficit before debt in 2012-2014 that led to rapid debt increase albeit from a low base. The rating also reflects the region's undiversified economy with a developed tax base that is exposed to the economic cycle, weak institutional framework and our expectation of a stagnant local economy following the negative national trend. Positively, the rating takes into account Kemerovo's low contingent risk.

Fitch expects the region's operating balance to consolidate at low positive values during 2015-2017, but the current balance to remain negative. Budgetary performance will be underpinned by growth of tax proceeds due to improved financials of mining and metallurgical companies, which are the largest taxpayers in the region.

In 2014, the operating balance returned to positive territory, driven by a 50% increase in transfers and modest recovery of corporate income tax. The latter was driven by the improving earnings of local exporters following the stabilisation of prices of key commodities and the depreciation of the rouble.

Fitch expects Kemerovo's direct risk to grow to 70%-75% of current revenue by end-2017, which is still consistent with the region's ratings. We also expect the deficit before debt to narrow due to cuts in capex limiting debt growth. The wide deficit before debt during 2012-2014 had resulted in a rapid rise in direct risk to RUB51bn (57% of current revenue) at end-2014, from RUB19bn (21%) in 2011.

Immediate refinancing risk is moderate; as at 1 October the region's debt comprised 37% subsidised budget loans, which are likely to be rolled over by the federal government. Another 48% direct risk is three-year bank loans. The maturity profile of these budget and bank loans is distributed between 2015 and 2018, with moderate concentration in 2018.

The region's obligations/liabilities also include a long-term bank loan from Vnesheconombank (VEB: BBB-/Negative/F3), which represented 12% of direct risk as of 1 October 2015. VEB extended credit facilities to private companies in the 1990s, which Kemerovo assumed as an aggregated loan in the mid-2000s. The loan is denominated in US dollars and exposes the region to unhedged foreign-currency risk. The risk is, however, mitigated by a low 1% annual interest rate and the long maturity to 1 January 2035, which takes the immediate pressure off the region's debt servicing burden.

Kemerovo has low contingent risk stemming from public sector entities' financial debt and issued guarantees. In late 2011, the region imposed a moratorium on new guarantees issuance and as of 1 October 2015 the region had no outstanding guarantees.

The region has a concentrated economy weighted towards coal mining and ferrous metallurgy. This provides an extensive tax base for the region's budget, accounting for 79% of operating revenue in 2014. However, this also means a large portion of the region's tax revenues depends on companies' profits, resulting in high revenue volatility through the economic cycle given its less diversified profile.

Kemerovo demonstrated close to zero GRP growth in real terms in 2014, following the deterioration of the national economic environment.

RATING SENSITIVITIES
An improvement in the operating balance to 6%-8% of operating revenue and maintenance of a debt payback ratio (direct risk to current balance) below 10 years on a sustainable base could lead to an upgrade.

The inability to maintain a positive operating balance on a sustained basis or an increase in direct risk above 90% of current revenue could lead to a downgrade.