ACRA affirms A(RU) to Kursk Region, changes outlook to Positive, and affirms A(RU) to bond issue

The outlook on the credit rating of the Kursk Region (hereinafter, the Region) has been changed on an increase in the liquidity of the regional budget. The Region's credit rating is based on its low debt load, conservative debt policy, and relatively high indicators of budget discipline. The rating is restricted by a medium development level of the regional economy.

The Kursk Region is a part of the Central Federal District and borders Ukraine and five administrative regions of Russia. The Region is located in the Central Black Earth Area and includes a part of the Kursk Magnetic Anomaly. 0.8% of Russia’s population live in the Region. The Region’s GRP is about 0.5% of the total GRP of Russia.

Key rating assessment factors

A conservative debt policy and a well-balanced budget liquidity management. In the last three years, the Region borrowed short-term inter-budget loans from the Office of the Federal Treasury (OFT) in order to save on interest expenses. As of some reporting dates selected in the period in question, the monthly volume of undrawn loans was equal or exceeded the Region’s average monthly expenses for the last 12 months. ACRA expects that the budget liquidity will grow further along with the balances on the Region's budget accounts.

The Region's Administration has maintained a conservative debt policy and has kept the debt load indicators within the limits corresponding to low risk levels. As of July 1, 2019, the Region's debt structure included inter-budget loans (53%) due in 2019–2034, bonds (13%) and an OFT loan (33%) borrowed to substitute a bank loan that remained non-repaid as of January 01, 2019. The relative debt load is expected to be around 66% of the operating balance by late 2019, which is an indication of a low risk level. The amount of interest payments and principal debt refinanced annually is not burdensome.

Budget discipline indicators depend on the federal government's support to the agricultural industry. In 2016–2019, the share of own revenues within the Region’s budget is expected to average 75% of the total revenues (excluding subventions). The Region's budget structure is influenced by federal subsidies granted to support agribusinesses; such subsidies may not be administered by the Region's Administration or regarded as a reserve in case capital expenditures are cut in favor of the current expenses. With a slow decline in the volume of subsidies (along with the gradual repayment of subsidized loans), the volume of expenses categorized as capital expenditures has been decreasing: at the end of 2018, the share of capital expenditures amounted to 17%, and it is projected at 16% by the end of 2019, while in 2016–2017, the share was 22–26%.

Moderate economic indicators restrict the rating. Regardless a sufficient level of diversification of the economy and tax revenues (the manufacturing sector has been contributing the maximum share in the GRP (18% on average in 2016–2018), while the mining sector has been contributing the maximum share in the tax and non-tax revenues (21% on average in 2016–2018)), the Region's per capita GRP and per capita income are low (around 68% and 84% of the national average in the period from 2014 to 2018).

Key assumptions

  • Further growth in the budget liquidity;
  • The debt policy to remain conservative;
  • The federal support to the Region’s agribusiness to decline gradually;
  • The mandatory budget expenditures not to exceed 75%.

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 :

  • Higher budget liquidity, no cash gaps within a prolonged period;
  • Higher operational balance;
  • Accelerated growth of the Region’s socio-economic development indicators.

A negative rating action may be prompted by:

  • Lower budget liquidity;
  • Higher share of the Region’s mandatory expenditures;
  • Higher current expenses that need to be financed through new borrowings.

Issue ratings

The Kursk Region, 35001 (ISIN RU000A0ZYCD1), maturity date: October 12, 2025, issue volume: RUB 4 bln (outstanding volume: RUB 1.3 bln) — А(RU).

Rationale. In ACRA’s opinion, the above bond issued by the Kursk Region is a senior unsecured debt instrument, and its credit rating is equal to that of the Kursk Region.

Regulatory disclosure

The credit ratings were assigned to the Kursk Region and the bond issued by the Kursk Region (ISIN RU000A0ZYCD1) 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 issue, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

For the first time, the credit rating of the Kursk Region and the credit rating of government securities of the Kursk Region (ISIN RU000A0ZYCD1) were published by ACRA on September 1, 2017, and October 10, 2017, respectively. The credit rating of the Kursk Region and its outlook as well as the credit rating of government securities issued by the Kursk Region (ISIN RU000A0ZYCD1) are expected to be revised within 182 days following the publication date of this press release in accordance with the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed based on data provided by the Kursk 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 Kursk Region Administration participated in their assignment.

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

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


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