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ACRA affirms AA(RU) to the Lipetsk Region, outlook Stable, and AA(RU) to bond issues

The credit rating of the Lipetsk Region (hereinafter, the Region) is based on its relatively low debt load, high level of liquidity, and stable budget discipline indicators. The credit rating is limited by the low diversification of the regional economy and economic indicators that are below the national averages.

The Region is located in the Central Federal District and borders six other regions. 1.1 million people live in the Region. According to the Region’s estimates, its gross regional product (GRP) amounted to RUB 539 bln in 2018.

Key rating assessment factors

Low debt load and low refinancing risks. As of November 1, 2019, the total debt of the Lipetsk Region amounted to RUB 10.4 bln and was primarily made up of budget loans (almost two-thirds of debt) and bonds (almost a third of debt). There was an insignificant share of bank loans and guarantees. At the end of 2019, the Region’s debt should be equal to approximately 70% of the operating balance and around 30% of tax and non-tax revenues (TNTR) of the budget. The operating balance after interest payments is expected to be four times higher than the debt servicing costs (the risk is minimal). ACRA expects the low debt load to be maintained throughout 2020, with the debt to operating balance ratio not exceeding 80% for the year. At the date of this analysis, the maximum share of debt subject to refinancing amounted to 25% of the current debt, and was scheduled for refinancing in 2020. In view of the low debt load, the refinancing risks are low. As of November 1, 2019, the budget account balances covered half of the Region’s total debt.

High budget discipline and control indicators. Budget expenditures are covered by the Region on its own: the average share of internal revenues, excluding subventions, will amount to 83% for 2017–2020. The share of capital expenditures should amount to about 24% of the total expenditures and be financed mostly from the Region’s own sources. At the same time, the share of mandatory expenditures is not expected to be high: 63% on average over the abovementioned period.

In 2019, the Region expects TNTR to fall by 10.7%, mainly due to decreased profit tax revenues resulting from the high base in 2018. TNTR for 2019 are anticipated to be 6.6% higher than TNTR for 2017. The Region takes a conservative view of the end-of-year deficit (19% of TNTR), however, even is this achieved the budget discipline assessment will not change.

The regional budget is very dependent on the metallurgy sector — ACRA estimates that metal production contributes 35–45% of TNTR in different years. Forming account balances comparable to the average monthly expenditures of the regional budget and the projected deficit has become a key area of budget policy due to the dependence on this single volatile sector. This year the Region is developing regulatory documentation that will allow it to place deposits on bank accounts.

Key assumptions

  • Maintaining high budget liquidity;
  • TNTR not declining by more than 11% in 2019 vs. 2018;
  • Maintaining a conservative debt policy.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Certain economic indicators growing to the national average levels.

A negative rating action may be prompted by:

  • Changes in the debt policy and the debt repayment schedule;
  • Falling tax revenues and the impossibility of cutting mandatory expenditures.

Issue ratings

Lipetsk Region Government Bond, 35010 (ISIN RU000A0ZZR33), maturity date: October 21, 2025, issue volume: RUB 3 bln, — АА(RU);

Lipetsk Region Government Bond, 35008 (ISIN RU000A0JTVZ8), maturity date: April 17, 2020, issue volume: RUB 3 bln, — АА(RU);

Lipetsk Region Government Bond, 34011 (ISIN RU000A1013T3), maturity date: November 21, 2024, issue volume: RUB 2.5 bln, — АА(RU).

Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Lipetsk Region.

Regulatory disclosure

The credit ratings were assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A0JTVZ8,  RU000A1013T3) under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning credit ratings to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit ratings assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A0JTVZ8, RU000A1013T3) were first published by ACRA on July 7, 2017, October 24, 2018, July 12, 2017, and November 21, 2019, respectively. The credit rating of the Lipetsk Region and its outlook and the credit ratings of the bonds issued by the Lipetsk Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings are based on data provided by the Administration of the Lipetsk Region, information from publicly available sources (Ministry of Finance, Federal State Statistics Service, and Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Administration of the Lipetsk Region participated in their assignment.

No material discrepancies between the provided data and data officially disclosed by the Lipetsk Region in its financial report have been discovered.

ACRA provided no additional services to the Administration of the Lipetsk Region. No conflicts of interest were discovered in the course of credit rating assignment.

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