The credit rating of the Sverdlovsk Region (hereinafter, the Region) was upgraded following application of the updated version of the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation (hereinafter, the Methodology). The rating is driven by strong economic profile of the Region, stable budget profile featuring a high share of own income and a growing share of capital expenditures in the budget, low leverage, low liquidity reserves, and a comfortable debt repayment schedule that poses no risks for liquidity and, therefore, low probability of urgent refinancing needs.
The Sverdlovsk Region is part of the Urals Federal District, bordering seven other administrative entities of the Russian Federation. The Region’s population is about 4.3 million people (3% of the total population in Russia). According to the Region’s government, its GRP amounted to RUB 2.5 trln in 2019 (the Region’s GRP has been consistently around 3% of the total GRP generated by the Russian regions).
The Region’s economic profile features moderate concentration on the metals sector. The Region’s averaged GRP per capita equaled 97% of the country average. At the same time, ACRA notes that the Region’s GRP per capita was growing faster than the country average GRP per capita in 2013-2017. The ratio of averaged wages to the minimum subsistence level exceeded 300% in 2015-2018. The two factors combined (GRP and wages) indicate that the economic profile of the Region qualifies for the second category at the initial assessment stage.
In 2019, the unemployment in the Region averaged1 for the last four years and calculated according to the WLO methodology equaled 4.9%.
1 The averaging was performed using the methods defined in the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
The processing industry with a moderate concentration in the metals sector forms the core of the Region’s economy. Of the Region’s top 20 companies in terms of revenue in 2018, fifteen were involved in metalworking. However, ACRA assesses the net share of the metals industry in total tax revenues of the Region at 21% in 2017-2018. According to the Methodology, the final assessment of the economic profile of the Region corresponds to “2”.
The Region’s leverage has slightly increased, but the debt repayment schedule mitigates the refinancing risks. The Region’s debt to current revenue ratio equaled 0.32x in 2019 (it was 0.3x in 2018). Based on the current budget figures, the ratio is estimated at 0.39x by the end of 2020. According to the Methodology, these figures correspond to the second leverage category. In 2019, the Region’s debt grew by RUB 4.4 bln and totaled RUB 77.2 bln as of January 1, 2020. The debt mostly includes market borrowings including bonds (32.4%) and commercial loans (41.8%). Budget loans accounted for 24.4% of the total debt and guarantees for 1.4%. The averaged interest expenses should be around 2% of total budget expenses excluding subventions in 2016-2020.
The debt repayment schedule shows that the Region will repay or refinance around 18% of debt on average each year in the period of 2020-2024, which corresponds to the minimum refinancing risk.
It is worth noting that leverage used by municipal entities (hereinafter, MEs) has been going down. The total debt to total tax and non-tax revenues (TNTR) ratio of the MEs dropped from 13% in 2016 to 9% in 2018. In absolute numbers, debt of the MEs declined by RUB 1.6 bln in the above period.
Self-sufficient budget with a growing share of capital expenditures. The Region’s budget has a high share of own revenues, which has been consistently above 90% of the total budget revenues. The averaged share of capital expenditures in budget expenses excluding subventions has increased from 10% to 14% in 2017-2019. In 2020, this figure will grow to 17%. The Region’s capital expenditures have almost doubled in 2017-2019.
The Region’s ratio of modified budget deficit to current income was mostly negative in 2017-2019, which points to a minor need to raise debt in order to refinance capital expenditures. According to the Region’s budget law, the budget deficit should be around 13% of TNTR (RUB 29.4 bln) in 2020 and will be financed through raising new debt. If the actual deficit matches the planned level with concurrent lack of sufficient liquidity to cover that deficit, by the end of 2020, the debt to TNTR ratio may exceed the level set forth in the budget loan restructuring agreement.
According to the up-to-date information on 2019 budget performance, the operating efficiency of the Region’s budget dropped to 11% from 18% in 2018. Lower corporate income tax receipts led to a 2% decline in the budget’s own revenues, while current expenses of the budget were up 7%. ACRA estimates that the operating efficiency of the budget will remain at a moderate level in 2020 amid a further decline in TNTR. In a conservative scenario, the averaged operating efficiency will decrease to 10% in 2020.
Accumulated liquidity allows financing budget expenses but is insufficient to finance the expected deficit. In the last 18 months, the available month-end account balances have been consistently around 50 percent of the monthly budget expenses. As of January 1, 2020, the accumulated liquidity covered no more than 8% of the total debt of the Region. According to the enacted budget law, the accumulated funds will be partially used to refinance future deficit.
The Stable outlook assumes that the rating will most likely unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
A negative rating action may be prompted by:
Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, volume: RUB 5 bln — А+(RU).
Rationale. ACRA is of the opinion that the above bonds issued by the Sverdlovsk Region are senior unsecured debt instruments, the credit ratings of which are equal to that of the Sverdlovsk Region.
The credit ratings of the Sverdlovsk Region and bonds (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9) issued by the Sverdlovsk Region were assigned 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. Over the course of the credit rating assignment 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 was also used.
The credit rating of the Sverdlovsk Region and the credit ratings of the government bonds (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9) issued by the Sverdlovsk Region were first published by ACRA on September 8, 2017, October 24, 2017, October 24, 2017, October 18, 2018, and December 11, 2019, respectively. The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9) issued by the Sverdlovsk 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 were assigned based on the data provided by the Sverdlovsk Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Sverdlovsk Regional Government participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by the Sverdlovsk Region in its financial reports have been discovered.
ACRA provided no additional services to the Sverdlovsk Regional Government. No conflicts of interest were discovered in the course of credit rating process.
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