Training on SF, December 10–11

ACRA affirms BB+(RU) on Mordovia, assigning the status “Rating under revision: negative,” and affirms BB+(RU) on bond issues, withdrawing the rating of the repaid issue.

The status “Rating under revision: negative” assigned to the credit rating of the Republic of Mordovia (hereinafter, the Republic of Mordovia, the Republic, the Region) reflects ACRA’s opinion on the possible further deterioration of the Region’s debt burden profile in connection with several factors:  

  • The expected continuation of the Region’s unfulfilled liabilities to the Ministry of Finance according to budget restructuring agreements in the amount of RUB 19.8 bln. (repayment schedule from 2018 through 2024), which will lead to the forced restructuring of budget loans with market debt;
  • The high probability of anticipatory repayment on part of the budget loans under which the restructuring agreement was not executed.
  • The increase in interest expenses due to the need to refinance the early repayable part of budget loans.

Key rating assessment factors

The Republic of Mordovia is part of the Privolzhsky Federal District. The Region’s population is around 0.8 mln (0.6% of the total population of the Russian Federation). In 2016, its GRP amounted to RUB 198 bln (0.3% of the total GRP of the Russian Federation).

The Republic of Mordovia is part of the Privolzhsky Federal District. The Region’s population is around 0.8 mln (0.6% of the total population of the Russian Federation). In 2016, its GRP amounted to RUB 198 bln (0.3% of the total GRP of the Russian Federation).

The BB+(RU) credit rating assigned to the Republic of Mordovia is due to its extremely high debt burden and low economic indicators.

ACRA believes that there is an extremely high risk of the Region’s continued breach of conditions stipulated in agreements on restructuring budget loans (on October 1, 2018, these loans amounted to about 35% of the debt profile). Because partial refinancing of these loans will be required, the Republic’s market debt share will continue to grow, which will drastically change the structure of its debt profile. The ratio of debt to the Region’s tax and non-tax revenue is growing, which will not allow the Republic to fulfill the conditions of the restructuring in the future. In 2018, the amount of the Region’s public debt will increase to 9%. Taking into account the planned growth of tax and non-tax revenue, ACRA believes that ratio of debt to the Region’s tax and non-tax revenue will not change and be around 226%. At the same time, according to ACRA’s outlook, in 2018, the ratio of budget deficit to the Region’s tax and non-tax revenue will amount to around 19% instead of the indicated 10% in restructuring agreements. The excess of this indicator in the current version of the budget law is provided by revenues from the sale of shares and other forms of capital owned by the Republic (in the amount of RUB 28 bln). In ACRA’s opinion, the fulfillment of this financing source’s budget line in the specified amount is unlikely. At the same time, ACRA pays particular attention to the fact that the current debt of public sector enterprises in the Region is approaching RUB 15 bln. (around 60% of budget revenue), while the volume of overdue accounts payable, according to the latest data, amounts to about RUB 0.5 bln.  

Key assumptions

  • Growth of the operational balance in 2018 by reducing mandatory spending; 
  • Fulfillment of tax and non-tax revenue assignments specified in the Republic’s budget law, which was valid at the time of the rating assignment;
  • Reduction of capital expenses from 2018 through 2019 as a result of completed preparations for the 2018 World Cup. 

Potential outlook or rating change factors

The status “rating under revision: negative” assumes with maximum possible probability a change in the rating within the short-term 90-day horizon.

Removal of status and downgrading of the credit rating may be prompted by:

  • Continued breach of conditions stipulated in agreements on restructuring budget loans.

Removal of status and confirmation of the credit rating at the current level may be prompted by:

  • The Republic’s fulfillment of the planned revenue amount from the sale of shares and other forms of capital owned by the Republic at the time of the credit rating assignment.
  • Provision of extraordinary support measures to the Republic’s budget that have not been taken into account in this revision.

Rating components

Affirmed

Bond loan, Republic of Mordovia Government Bond, 2015, RegS RU34002MOR0, ISIN RU000A0JVV49, repayment date - October 14, 2020, issue volume - RUB 3 bln. - BB+(RU);

Bond loan, Republic of Mordovia Government Bond, 2016, RegS RU34003MOR0, ISIN RU000A0JWSQ7, repayment date - September 3, 2021, issue volume - RUB 5 bln. - BB+(RU).

Credit rating rationale. The above listed bond issues of the Republic of Mordovia, in ACRA’s opinion, are senior unsecured instruments, and their credit rating is equal to the rating assigned to the Republic of Mordovia – BB+(RU).

Withdrawn  

Bond loan, Republic of Mordovia Government Bond, 2013, RegS RU34001MOR0, ISIN RU000A0JU8Q3, repayment date - October 22, 2018,  issue volume -  RUB 3 bln.

Credit rating withdrawal rationale.  The withdrawal of the credit rating assigned to the 2013 bond issued by the Republic of Mordovia (RegS RU34001MOR0, ISIN RU000A0JU8Q3) is due to the full repayment of the issued bond.

Regulatory disclosure

The credit ratings have been assigned to the Republic of Mordovia and to bonds issued by the Republic of Mordovia (ISIN RU000A0JU8Q3, RU000A0JVV49, RU000A0JWSQ7) under the national scale for the Russian Federation based on the Methodology for Credit Rating 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 process of credit rating assignment to the above issues, 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 Republic of Mordovia and credit ratings of government securities of the Republic of Mordovia (ISIN RU000A0JU8Q3, RU000A0JVV49, RU000A0JWSQ7) were published by ACRA on November 8, 2017, for the first time.

The credit rating of the Republic of Mordovia and its outlook as well as the credit ratings of government securities issues of the Republic of Mordovia (ISIN RU000A0JVV49, RU000A0JWSQ7) are expected to be revised within 90 days after the rating action date (November 1, 2018) in compliance with the 2018 calendar of planned sovereign credit rating revisions and publications.

The credit rating was 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 rating is solicited, and the Republic of Mordovia participated in its assignment.

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

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

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