ACRA Modelling Day - 2018

ACRA affirms BB+(RU) to the Republic of Mordovia and its bonds, outlook downgraded to Negative

ACRA has downgraded the credit rating outlook for the Republic of Mordovia (the Region) due to fast growing budget expenditures and shrinking budget revenues, which has led to higher debt load, as well as due to a risk of breach of budget loans restructuring terms, which may result in the need to prepay a part of budget loans.

The Republic of Mordovia is a part of the Volga Federal District, bordering with five administrative entities of the Russian Federation. Its population amounts to about 0.8 million people (which is 0.6% of the total Russia’s population, ranking 61st). In 2016, the Republic’s GRP amounted to RUB 198 billion (0.3% of the total GRP of Russian regions, ranking 64th).

Key rating assessment factors

Fast growing budget expenditures and shrinking budget revenues have resulted in the record high budget deficit. In 2017, the Region demonstrated a 10% growth in budget expenditures and a 6% decline in budget revenues against 2016. Expenditures grew in such sectors like housing and utilities, physical culture and sports, which accounted for 62% of the total growth in budget expenditures. Budget revenues declined due to lower earnings from excise duties and lower non-repayable federal budget subsidies. ACRA notes that the operating balance has declined to 11.7% in 2017 against 25.1% in 2016, which increased the risks that the Region would be able to finance capital expenditures and and service its debts. In 2017, budget capital expenditures remained high (22.8% iof the total expenditures), and they were funded by additional loans. ACRA notes that the bedget planning accuracy is low. In 2017, the actual budget expenditures exceeded the planned volume by 47%, while actual revenues exceeded the planned volume by 25%. The actual budget deficit amounted to a record high 43.2% against the declared 9.9% at the beginning of the year. The reason is a failure to perform the privatization program (a gap of RUB 19.7 billion) and subsequent increase in the debt. For 2018, the Region has also planned to cover the budget deficit by privatization (the planned amount is RUB 22.5 billion). But, taking into account failures to comply with such plans in the past years, ACRA notes that the risk of growing debt load and budget deficit going up to 25% against 10.8% indicated in the 2018 budget remains high.

Fast growing debt load results in a higher risk of failure to comply with budget loans restructuring terms. In 2017, the Region's debt has increased by 24% up to RUB 49.9 billion. Irrespective of the extension of debt repayment deadlines following the budget loan restructuring, ACRA notes that the risk of failure to comply with budget loans restructuring terms is high, because the volume of commercial debt is continue to grow. In 2018 and 2019, the Region is expected to repay 40% of the restructured loans, which will increase the repayment share of debt portfolio up to 35% against the current 15%. In case the Region fails to get the planned earnings from the privatization program in 2018, ACRA expects that the regional debt may become as high as RUB 10 billion, while the expenditures may remain at the level of 2017.

Key assumptions

  • The operating balance of at least 12% in 2018;
  • Capital expenditures of at least 15% of the total budget spending in 2018;
  • Budget deficit cap of 25% in 2018;
  • Loan repayment deadlines to remain unchanged since early 2018.

Potential outlook or rating change factors

The Negative outlook assumes that the rating will most likely be downgraded within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • The share of budget revenues generated from income tax growing above 20% of the tax and non-tax revenues amid stable revenues from other types of income;
  • Complying with budget loans restructuring terms and maintaining the current loan repayment deadlines;
  • Decline in the debt load (the debt to operating balance ratio at 4x).

A negative rating action may be prompted by:

  • Declining operating balance below 8%;
  • Growing debt load on account of market funding sources, accompanied by debt service costs;
  • A breach of budget loan restructuring terms, accompanied by growing repayments up to 35% of the debt portfolio in 2018–2019.

Issue ratings

Republic of Mordovia Government Bond, 2013 (ISIN RU000A0JU8Q3), maturity date: October 22, 2018, issue volume: RUB 3 bln — BB+(RU);

Republic of Mordovia Government Bond, 2015 (ISIN RU000A0JVV49), maturity date: October 14, 2020, issue volume: RUB 3 bln — BB+(RU);

Republic of Mordovia Government Bond, 2016 (ISIN RU000A0JWSQ7), maturity date: September 03, 2021, issue volume: RUB 5 bln — BB+(RU).

Credit rating rationale. The above bonds issued by the Republic of Mordovia have, in ACRA’s opinion, the status of senior unsecured debt, with their credit ratings corresponding to the credit rating of the Republic of Mordovia — BB+(RU).

Regulatory disclosure

The credit ratings were assigned to the Republic of Mordovia and to bonds issued by the Republic of Mordovia (ISIN RU000A0JU8Q3, ISIN RU000A0JVV49, ISIN RU000A0JWSQ7) 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit ratings assigned to the Republic of Mordovia and to the bonds of the Republic of Mordovia (ISIN RU000A0JU8Q3, ISIN RU000A0JVV49, ISIN RU000A0JWSQ7) were first published by ACRA on November 08, 2017.

The credit rating and credit rating outlook of the Republic of Mordovia and the credit ratings of the bonds of the Republic of Mordovia (ISIN RU000A0JU8Q3, ISIN RU000A0JVV49, ISIN RU000A0JWSQ7) are expected to be revised within 182 days following the rating action date (May 04, 2018) in accordance with the 2018 calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Republic of Mordovia, 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 Republic of Mordovia Government participated in their assignment.

No material discrepancies between the data provided and the data officially disclosed by the Republic of Mordovia in its financial report have been discovered.

ACRA provided no additional services to the Republic of Mordovia Government. No conflicts of interest were discovered in the course of credit rating assignment.

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