OREANDA-NEWS. Fitch Ratings has affirmed the Russian City of Tomsk's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks and its Short-term foreign currency IDR at 'B'.

The agency has also affirmed the city's National Long-term rating at 'AA-(rus)' with a Stable Outlook. The city's senior debt ratings have been affirmed at 'BB'/'AA-(rus)'.

The affirmation reflects that Tomsk's fiscal performance has been in line with Fitch's baseline scenario, with moderate deterioration in its operating balance but which remains sufficient to cover interest payments. We expect moderate debt levels over the medium term.

KEY RATING DRIVERS
Fitch projects the city's operating margin to consolidate at 6% (2015: 7%) in 2016-2018, below an average 13.5% in 2013-2014. The deterioration is driven by the city's limited capacity to boost tax revenue amid an economic downswing in Russia and rigid operating expenditure. In 2015, the local authorities increased the cadastral value of land plots and cancelled land tax privileges for certain categories of taxpayers. This resulted in land tax revenue growing 47.7% yoy in 2015. However, this was not sufficient to offset the 7% decline of current transfers from the Tomsk region in 2015 (48% of operating revenue).

Fitch forecasts Tomsk will maintain debt at moderate levels at under 40% (2015: 32%) of current revenue in 2016-2018, as the city's administration seeks to limit expenditure growth well below inflation (2015: 15.5%) in its aim to balance its budget over the medium term. We project the deficit before debt variation to narrow to 4% of total revenue in 2016-2018 from 5.3% in 2015 as the city's capex reduces to 16%-20% of total expenditure from an average 24% in 2013-2015. The capex will be largely driven by construction of new schools and subsidies for affordable housing provision.

We expect the city's debt payback ratio (debt to current balance) to rise to double digits from a reasonable six years in 2015 and a strong two-to-three years in 2013-2014, due to a lower current balance. This is likely to exceed Tomsk's debt average maturity profile (February 2016: 1.5 years) but still commensurate with a 'BB' rating.

The city's debt profile is weighted towards one-to-three year bank loans that represented 80% of the city's debt at end-January 2016. The remaining debt is bond issues with four-to-five years of maturities. A substantial portion of debt (RUB2bn or 68%) matures in 2016, which is likely to expose the city to high refinancing risk. The administration plans to fund refinancing needs with bank loans; at end-January 2016, it had RUB1.7bn of undrawn revolving credit lines. Additional funding may come from the issuance of up to RUB895m bonds from the programmes launched in 2014-2015.

The city's administration managed to keep interest expenses at less than 2% of operating revenue in 2013-2015 as it partially substituted expensive market borrowings with low-cost short-term state treasury loans (0.1% interest per annum). Over the medium term Fitch considers that volatile interest rates in domestic markets may put pressure on the city's current margin.

Tomsk has a well-diversified service-oriented economy, dominated by academic and research educational institutions. The tax concentration of the city's revenue is low, with the top 10 taxpayers representing 13% (2014: 8%) of total tax revenue in 2015. Fitch forecasts national GDP will contract 1% in 2016, which will, albeit to a lesser extent, negatively impact the city's economy.

RATING SENSITIVITIES
Increasing direct risk above 50% of current revenue, coupled with growing refinancing pressure, could lead to a downgrade.

An upgrade is unlikely in the medium term unless the city returns to an operating surplus of 20% of operating revenue, coupled with a lengthening of the city's debt profile.