ACRA Trainings on Credit Analysis

ACRA affirms AA-(RU) to the Lipetsk Region, outlook Stable, and to bonds issued by the Lipetsk Region

The credit rating of the Lipetsk Region (hereinafter, the Region) is based on high dependence of its tax revenues on the largest taxpayer, consistent budgetary discipline and flexible budget expenditures, excessive liquidity that covers about 65% of the Region’s total market debt, and well-balanced debt profile. The rating is restricted by the per capita economic indicators, which are lower than national average figures.

The Region is located in the Central Federal District and borders with six other regions. 1.1 mln people live in the Region. The Gross Regional Product (GRP) amounted to RUB 429 bln in 2015 (39th place among Russian regions). The Region hosts Novolipetsk Steel (NLMK), the largest Russian and world’s 16th steel manufacturer, with the production volume of 16.6 mln tons in 2016.

Key rating assessment factors

The regional economy’s backbone is metal industry and new economic growth areas. In 2013–2016, the average annual exports from the Region amounted to 40% of the GRP. The 2014–2015 ruble devaluation increased the competitiveness of metal products on international markets, which is positive for the Region’s economy. Notwithstanding the dominance of metal industry (as the Region’s economy is ill-diversified), the dependence of the GRP and the budget of the Lipetsk Region on the international steel market has lessened significantly in the last seven years, driven by fast-growing food industry, agriculture, wholesale and retail trade, services, and real estate sector. According to actual data for 2014–2015 and estimated data for 2016–2017, the average per capita income and the GRP per capita are 87% and 92% of the Russian averages, respectively. The rate of unemployment (according to ILO methodology) is much lower than the national average.

Well-balanced budget with a high share of tax revenues and moderate mandatory expenditures. According to actual data for 2014–2016 and estimated data for 2017, the tax and non-tax revenues (TNTR) account for about 82% of the total budget revenues in the Region (except subventions), which indicates a high self-sufficiency of budget revenues. In 2014–2016, the share of profit tax in the TNTR was 42.7% and the share of personal income tax was 26.6%. The share of mandatory (as per ACRA methodology) expenditures was 65%, which indicates a moderate level of control over the budget expenditures. The operating balance has been stable in 2014–2017 (28% of the regular revenues on average). The average development budget is relatively high (about 20%). According to ACRA estimates, the Region's budget surplus may amount to about 1.4% of the TNTR.

Well-balanced budget debt profile. Budget loans were restructured in 2017 to smooth the schedule of repayments; therefore, repayments expected in 2018 will amount to 64% of those prior to such restructure. The debt to operating balance ratio indicates a moderate risk level. Nevertheless, as at December 01, 2017, the amount of funds in the single budget account, except federal budget funds, was 65% of the entire market debt of the Region.

Excess liquidity excludes the need for short-term borrowings. In the last two years, the monthly average budget account balance was about RUB 6.5 bln, which is higher than annual repayments. There were no cash deficiencies, and the Region made no federal treasury borrowings or short-term bank borrowings to cover current expenses.

Key assumptions

  • Stably high share of the metal industry in the GRP profile;
  • Further development and diversification of the non-metal sector of the regional economy;
  • Mandatory budget expenditures to remain under strict control;
  • Stably high liquidity;
  • Restructuring budget loans.

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:

  • Economic growth indicators (per capita) outpacing the national average;
  • Further development and diversification of the non-metal segment of the regional economy;
  • A substantial decline in the debt to operating balance ratio.

A negative rating action may be prompted by:

  • A significant deterioration in the financial standing of NLMK, which may affect the Region’s budget;
  • Mandatory budget expenditures growing up to over 70%;
  • The debt to operating balance ratio exceeding 2.6x.

Issue ratings

ACRA assigned АА-(RU) to:

The Lipetsk Region, 35008 (ISIN RU000A0JTVZ8), maturity date: April 17, 2020,
issue volume: RUB 3 bln;

The Lipetsk Region, 34009 (ISIN RU000A0JUNK5), maturity date: June 04, 2019,
issue volume: RUB 5 bln.

Credit rating rationale. In ACRA's opinion, the above bonds are senior unsecured debt, and their credit rating is on par with the rating of the Lipetsk Region.

Regulatory disclosure

The credit ratings were assigned to the Lipetsk Region and the bonds (ISIN RU000A0JTVZ8, RU000A0JUNK5) issued by the Lipetsk Region 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. To assign credit ratings to the bond issues above, ACRA also used the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.

The credit rating assigned to the Lipetsk Region was first published by ACRA on July 07, 2017. The credit rating of the Lipetsk Region and its outlook are expected to be revised within 182 days following the rating action date (December 27, 2017) as per the 2017-2018 Calendar of planned sovereign credit rating revisions and publications.

The credit rating assigned to the government bonds (ISIN RU000A0JTVZ8, RU000A0JUNK5) issued by the Lipetsk Region was first published by ACRA on July 12, 2017. The credit rating is expected to be revised within 182 days following the rating action date (December 27, 2017) as per the 2017-2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed based on the data provided by the Lipetsk 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 Government of the Lipetsk Region participated in their assignment and affirmation.

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

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

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