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ACRA affirms BBB(RU) to the Tver Region, outlook Stable, and BBB(RU) to bond issue

The credit rating assigned to the Tver Region (hereinafter, the Region) is determined by a high level of debt burden versus the operating balance, moderate economic development indicators as compared to the national average, high self-sufficiency of the budget coupled with limited flexibility of fiscal spending and high liquidity.

The Tver Region is located in the Central Federal District. The Region generates 16% of the total electric power of the Central Federal District. The Region ranks second (after Moscow) among regions of the Central Federal District in terms of generated electric power (2016 data).

Key rating assessment factors

Limited flexibility of fiscal spending with high self-sufficiency of the budget. The Region’s budget has high level of self-sufficiency (81% on average in 2015-2018 excluding subventions) and fairly diversified tax revenues, but flexibility of fiscal spending is limited (the share of mandatory spending is 78% on average). The average operating balance / capital expenditures stand at 21% / 12% of regular revenues. In view of limited flexibility of fiscal spending, capital expenditures account for only 11% of budget expenses (according to 2014-2016 data and the Region’s 2017 forecast). The 2017 budget surplus funds were partially applied to push down the debt load; the other portion of the surplus was put to budget accounts. According to ACRA estimates for 2018–2019, the budget discipline indicators will be within the range corresponding to the medium assessment under the ACRA methodology.

Irregular debt repayment schedule. In 2017, the ratio of debt to operating balance amounted to 2.2; ACRA expects that, by late 2018, the ratio will change insignificantly. As the Region participates in the budget restructuring program, the operating balance less interest expenses several times exceeds the total amount of repayments expected in 2018–2019. However, the one-off repayment of the bank debt expected in 2020 but reflected as of early 2018, impairs the above indicator significantly by 2020. Although ACRA sees no risks that the bank debt will need to be refinanced and such debt was repaid as of May 1, 2018, the irregular debt repayment schedule is a factor restricting the rating assessment, especially taking into account that the Region will have to borrow in the end of the financial year. Interest expenses are not burdensome.

Commitments of companies from the quasi-public sector. A Tver-based company of high social importance directly owned neither by the regional government nor by the city administration has a substantial amount of payables; the outlook for this debt to be settled is unclear. According to ACRA’s opinion, this indebtedness may bear risks for the regional budget. Therefore, the Agency deems reasonable to include these payables into secondary liabilities of public sector enterprises (despite lack of interrelation between the Region’s government and ultimate beneficiaries of the said organization).

High liquidity. The Region uses funds of public sector and autonomous government institutions in managing liquidity. The actual amount of available liquidity allows the Region to timely perform its expenditure commitments including interest payments.

Key assumptions

  • Maintaining the share of the Region’s mandatory spending capped at 80% of budget expenses;
  • Maintaining the amount of transfers in 2019-2020 at the 2017-2018 level.

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:

  • Financial standing improvement of quasi-public-sector companies operating in the Region;
  • Structural improvement of debt repayment profile;
  • A lower share of mandatory spending in the Region’s budget.

A negative rating action may be prompted by:

  • A decrease in own revenues of the budget by 6% or more from values projected by ACRA;
  • A return to the practice of raising short-term bank loans;
  • Higher relative debt load.

Issue ratings

The Tver Region, 34009 (ISIN RU000A0JUAX5); maturity date: November 22, 2018, issue volume: RUB 3 bln — BBB(RU).

Credit rating rationale. ACRA is of the opinion that the bond issued by the Tver Region has a status of senior unsecured debt. Credit rating of this debt instrument corresponds to the credit rating of the Tver Region.

Regulatory disclosure

The credit ratings of the Tver Region and bond issued by the Tver Region (ISIN RU000A0JUAX5) have been 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 the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issue above, Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

For the first time, ACRA published the credit rating of the Tver Region and the credit rating of the government bond of the Tver Region on December 12, 2017. The credit rating of the Tver Region and its outlook and the credit rating of the government bond of the Tver Region are expected to be revised within 182 days following the rating action date (June 7, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Tver Region, information from publicly available sources (the RF 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 Tver Region participated in their assignment.

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

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

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