Training on sovereign risk credit analysis, October 24

ACRA affirms A(RU) to the Orenburg Region, changes outlook to Positive, and affirms A(RU) to bonds issues

The outlook on the credit rating of the Orenburg Region (hereinafter, the Region) has been changed to Positive due to a reduction in debt load as a result of repayment of part of the debt as the regional budget in 2018 was executed with a significant surplus. The credit rating takes into account the moderate indicators of Region’s economic development in comparison to the national averages, the significant dependence of economic and budget indicators on the Region’s dominant industries (hydrocarbon production), and the Region’s highly self-sufficient budget with a significant share of mandatory expenses.

The Orenburg Region is located in the Volga Federal District at the crossroads of two continents, Europe and Asia. The Region shares borders with five other regions in Russia, as well as with Kazakhstan. 1.3% of Russian’s population lives in the Region and it accounts for 1.2% of Russia’s total GRP. The Region produces around 3% of Russia’s crude oil and gas annually.

Key rating assessment factors

The Region’s 2018 budget, according to operating data, was executed with a 16% surplus on tax and non-tax revenues (RUB 11.7 bln). The budget surplus is due to the growth in tax revenues while maintaining the unchanged expenditure part of the budget. The main increase in tax revenues was provided by mining (+16% for the three quarters of 2018 compared to the indicator for the same period of 2017 – RUB 2.5 bln) and manufacturing (+42% for the three quarters of 2018 compared to the indicator for the same period of 2017 – RUB 1.9 bln, mostly metallurgy). The growth of tax revenues is mainly driven by income tax, the growth of revenues that is associated with a long period of high ruble prices for metals and hydrocarbons. The share of mandatory expenses in the budget from 2015 to 2018, according to ACRA’s forecast, was 74% on average. In 2019-2020, it could fall to 70%, which could potentially lead to a high level of flexibility in the Region’s budget expenses. At the same time, there is a gradual increase in the share of the budget’s capital expenses (including due to the increased costs of road construction). According to ACRA’s assessment, the share of capital expenses was on average 15% for 2015-2018 and could grow to 19% in 2019-2020.

The budget surplus enabled the Region to cut the debt load and build financial reserves. In 2018, the Region reduced its debt by 10% (RUB 2.6 bln). The decrease in debt coupled with the growth in regular revenues led to the debt to operating balance ratio reducing by half (down to 0.75) by the end of 2018. Because of the Region’s balanced debt repayment schedule (it will need to pay off no more than 11% of its debt annually in 2019-2024), the ratio of the operating balance minus interest expenses to debt repayment is expected to exceed ten in 2019-2020, which corresponds to the minimal level of risk according to ACRA’s methodology. The Region’s debt servicing costs are not burdensome. ACRA forecasts that debt load indicators will remain stable in 2018-2020. As of January 1, 2019, funds held on the Region's accounts amount to RUB 9 bln, or 140% of its average monthly expenses in 2018 (for the first time in the analyzed period). According to ACRA, such a liquidity reserve opens up opportunities for changing the Region’s spending structure, or a further decline in debt.

Key assumptions

  • Tax revenues in 2019-2020 amounting no lower than the planned level;
  • Maintaining conservative budget and debt policies. 

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Further decrease in debt load;
  • Growth in the budget’s independently financed capital expenses;
  • Growth in economic development indicators (per capita).

A negative rating action may be prompted by:

  • Significant increase in the current expenses of the regional budget in the case of market deterioration and negative price dynamics in metallurgy, as well as in the hydrocarbon sector.

Issue ratings

Orenburg Region Government Bond, 35001 (ISIN RU000A0JTZK1); maturity date — June 19, 2019, issue volume — RUB 5 bln — A(RU).

Orenburg Region Government Bond, 35002 (ISIN RU000A0JUPE3); maturity date — June 14, 2021, issue volume — RUB 6 bln — A(RU).

Orenburg Region Government Bond, 35003 (ISIN RU000A0JVM81); maturity date — July 3, 2025, issue volume — RUB 5 bln — A(RU).

Orenburg Region Government Bond, 35004 (ISIN RU000A0ZYKH5); maturity date — December 2, 2027, issue volume — RUB 4 bln — A(RU).

Credit rating rationale. In ACRA’s opinion, the bonds issued by the Orenburg Region are senior unsecured debt instruments, and their credit rating is equal to the rating assigned to the Orenburg Region.

Regulatory disclosure

The credit ratings of the Orenburg Region and bonds issued by the Orenburg Region (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) under the national scale for the Russian Federation were assigned and affirmed 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. In the course of assigning a credit rating 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 Orenburg Region and the credit ratings of the government bonds (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region were first published by ACRA on January 31, 2018. The credit rating of the Orenburg Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region are expected to be revised within 182 days following the rating action date (January 23, 2019) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Orenburg 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 Orenburg Region participated in the rating process.

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

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

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