Fitch Affirms Russia's Belgorod Region at 'BB'; Outlook 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 Belgorod region's 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 sound operating performance, moderate direct debt and well-diversified economy. The ratings also take into account exposure to contingent risk as well as the nationwide economic downturn, which could negatively influence the region's financials.
Fitch expects the region will maintain a stable operating margin at 8%-10% in 2015-2017 (2014: 10.9%). This will be supported by moderate growth of tax revenue and continuous implementation of cost-effectiveness measures. The region cut operating spending by 7% in 2014 amid stagnating revenue, and Fitch projects opex growth will not be higher than 3% in 2015.
The deficit before debt variation will widen to 8% in 2015, according to Fitch's estimate, from a low 1.4% in 2014. The deficit increase will be capex-driven as the region decided to spend more on road modernisation in 2015. The maintenance of roads in adequate condition is one of the regional priorities as the administration believes it is a way to promote the development of logistics and transport services in the region. In Fitch's view, the deficit will narrow to 4%-6% in 2016-2017, contributing to moderate growth of direct risk.
Fitch projects the region's direct risk will remain below 60% of current revenue over the medium term, which is moderate in the international context. The region did not recourse to expensive bank funding during 2015 for refinancing needs, but issued a new RUB5.25bn amortising domestic bond at 12.65% coupon with final maturity in 2020. In 2015, Belgorod also received support from federal government in the form of RUB4.1bn budget loans due in 2018 with a negligible 0.1% annual interest rate. This led to interest payments being minimised amid high rates on the domestic capital market.
Overall, the region's maturity profile is longer and smoother than most of its national peers, which puts Belgorod in more favourable position in terms of refinancing pressure. Nevertheless, the weighted average maturity of four years lags behind the debt coverage ratio (direct risk to current balance) of seven years.
Contingent liabilities accounted for around 25% of Belgorod's current revenue. Most of this relates to guarantees (RUB11.5bn) that the region provides to support regionally important enterprises, largely operating in agriculture. In addition, Fitch considers RUB4.8bn of debt at public road company Obldorsnab as direct risk as Belgorod provides a subsidy to the company to repay principal and interests on this loan. The administration does not plan to expand its support to public sector entities, and Fitch expects the net overall risk will stabilise at below 80% of current revenue in 2015-2017.
The region has a well-diversified economy based on agriculture, mining and food processing. Its wealth indicators are strong in the national context with GRP per capita at 140% of the national median in 2013. The regional economy grew by 2.2% yoy in 2014, outpacing national weak growth of 0.6%. Fitch notices that the national economic downturn could have a negative impact on the region's economic development in 2015.
RATING SENSITIVITIES
An improved national economic context leading to a sustainable operating balance and debt coverage in line with the region's average maturity profile could lead to an upgrade.
Growth in direct risk to above 70% of current revenue, coupled with a weak close to zero current margin, could lead to a downgrade.
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