ACRA affirms BBB(RU) to the Volgograd Region and its bond issues, changes outlook to Positive

The change in outlook to the credit rating of the Volgograd Region (hereinafter, the Region) is due to the reduction in the Region’s debt load at the end of 2018 and the expected change in the Region’s debt repayment schedule. The Region’s credit rating is limited by the low flexibility of budget expenses, low levels of liquidity, and regional development levels (per capita) that are far below the national average. 

The Volgograd Region is part of the Southern Federal District and borders Kazakhstan. 2.5 million people live in the region and its 2018 GRP amounted to RUB 860 bln.

Key rating assessment factors

Reduced debt load and expected debt refinancing. In 2019, the Region is expected to repay only 6% of its actual debt as of January 1, 2019. In 2020, however, the Region plans to repay 27% of its debt, about one fifth of its tax and non-tax revenues (TNTR) for 2018. Budget loans make up about half of the Region’s debt structure. Therefore, the long-term debt profile will depend on possible budget loan maturity extensions at the end of 2019, as well as the terms for refinancing bank debt. In 2018, growth in TNTR allowed the Region to reduce absolute debt by 4% and the debt to operating balance ratio to two. If the Region executes its budget according to the current version of the regional budget law, the debt to operating balance ratio could grow to 2.3x by the end of the year amidst a reduction in operating balance. Due to the growth in TNTR, the Region’s debt to TNTR ratio is well below the level established by the additional agreements with the Ministry of Finance on budget loan restructuring. The Region’s interest expenses are not burdensome.

Low flexibility of budget expenses. The Region’s TNTR grew by 17% in 2018 (corporate income tax (CIT) and personal income tax (PIT) made the biggest contributions; the growth in PIT was due to a change in tax distribution in favor of the regional budget). In 2018, the Region executed its budget with a 4% TNTR surplus. The current version of the budget law assumes an increase in the Region’s TNTR by only 2% in 2019 as a result of the planned reduction of CIT revenues. However, because the deduction regulations on PIT to municipal budgets continue to decline, regional budget revenues will increase quantitatively and the pace of regional budget execution on PIT makes it possible to assume its revenue execution at a level higher than inflation. According to ACRA, TNTR should average 72% of revenues in 2016-2019 (excluding subventions); mandatory (according to ACRA’s methodology) expenses should be comparably high at 75%. Capital expenses are low; however, they should double in 2019 due to an increase in federal transfers. Possible structural changes in the budget leading to growth in capital expenses will not change the assessment of the Region’s budget flexibility because these expenses will be co-financed.

In ACRA’s opinion, the steady decline in the regional budget’s overdue accounts payable has a positive effect on the Region’s creditworthiness assessment.

A diversified economy with per capita income below the national average. The Region's economy is based on manufacturing industries (petroleum products, finished metal products, food industry), trade (wholesale and retail), and the agricultural industry. Socioeconomic development indicators (per capita income, per capita GRP, and unemployment) lag behind the national averages.

Key assumptions

  • Budget execution without a deficit in 2019;
  • A double in transfers to finance capital expenses. 

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:

  • Maturity extensions for budget loans and bank debt;
  • Reduction in mandatory expenses leading to an increase in operating balance;
  • Significant reduction in debt load (debt to operating balance ratio).

A negative rating action may be prompted by:

  • Nonfulfillment of budget revenues and the inability to reduce mandatory expenses for 2018;
  • Significant reduction in operating balance;
  • Increase in accounts payable. 

Issue ratings

Volgograd Region Government Bond, 2014, 35005 (ISIN RU000A0JUP89)

Maturity date – July 13, 2019, issue volume – RUB 5 bln, BBB(RU);

Volgograd Region Government Bond, 2015, 35006 (ISIN RU000A0JVU65)

Maturity date – October 30, 2020, issue volume – RUB 5 bln, BBB(RU);

Volgograd Region Government Bond, 2017, 35007 (ISIN RU000A0JXSD3)

Maturity date – June 2, 2024, issue volume – RUB 10 bln, BBB(RU).

Rationale. In ACRA’s opinion, the above bonds issued by the Volgograd Region are senior unsecured instruments, and their credit ratings are equal to the rating assigned to the Volgograd Region.

The credit ratings of the Volgograd Region and the bonds (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) issued by the Volgograd Region were 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 the credit rating process relating to the above bond 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 assigned to the Volgograd Region was published by ACRA for the first time on June 26, 2017. The credit ratings assigned to the sovereign bonds issued by the Volgograd Region (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) were published by ACRA for the first time on June 27, 2017.

The credit rating of the Volgograd Region and its outlook and the credit ratings assigned to the sovereign bonds (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) issued by the Volgograd Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and confirmed based on the data provided by the Administration of the Volgograd 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 Administration of the Volgograd Region participated in the rating process.

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

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

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