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ACRA affirms B(RU) to the Republic of Mordovia and its bonds, changes outlook to Negative

ACRA has downgraded the credit rating outlook of the Republic of Mordovia (hereinafter, the Republic, or the Region) due to the Region’s limited sources of external funding and the probability of failure to execute the debt reduction schedule. The rating is based on the Region’s high debt load, critical liquidity levels, lower economic indicators compared to national averages, and substantial debt in public sector enterprises.

Key rating assessment factors

Limited external funding sources. The Region’s capacity to perform its obligations to creditors is backed by undrawn credit lines totaling RUB 1.8 bln and a RUB 2.0 bln loan provided by the Federal Treasury Department. There are no other funding sources. ACRA is of the opinion that timely conclusion of another loan agreement with the Federal Treasury Department should provide additional funds necessary to cover the redemption of part of a bond loan and payment of part of budget loans in September. At the same time, this could result in  liquidity risk materializing for the Region as Federal Treasury Department loans are always subject to mandatory repayment in November.

Likelihood of failure to execute the debt reduction schedule is growing in view of the Region’s budget execution trends. The rate of budget revenue growth means it is unlikely that the Region will execute the debt reduction schedule established by the obligation to reduce the absolute amount of debt in the extension agreement on budget enforcement measures. The Region’s annual revenue target may not be achieved and, in ACRA’s opinion, proceeds from the sale of shares and other forms of capital owned by the Region will fall short of covering budget deficit financing requirements. The Agency assumes the Region will only be able to execute the schedule if it increases accounts payable or receives additional financial support from a higher budget. Nevertheless, debt repayments for 2019 are included in the regional budget’s list of priority expenditures.

Further debt reduction is unlikely. In 2020 the Republic must repay RUB 2.2 bln and refinance at least RUB 11 bln, which is the equivalent of half of its budget revenues. In view of the Republic’s recent purchases, ACRA believes that the banks lending to the Republic may be forced to provide credit facilities to replace repayable debt. The Agency does not possess information on whether the Republic’s new debt is subject to an interest rate cap and so the possibility of significantly higher borrowing costs cannot be ruled out. We cannot see any other sources of funding besides potential support from a higher budget or extraordinary support measures.

Extended debt of public sector enterprises puts additional pressure on the rating. The significant debt of the Region’s public sector enterprises, which is more than half of its own budget revenues, creates risks for the budget. Despite the risk of bank collections falling on the Region’s budget under guarantees issued to these enterprises, part of these guarantees have expired, and ACRA cannot confirm that the risk has been implemented.

Key assumptions

  • Failure to collect budget revenues and obtain funding necessary to cover the deficit for 2019 indicated by the current version of the budget law;
  • Refinancing of bank loans in 2020.

Potential outlook or rating change factors

The Negative outlook assumes that the rating will most likely be downgraded within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Reduction of the Republic’s debt in 2019 below the values set by the Ministry of Finance of Russia without increasing overdue accounts payable, and the emergence of sources for refinancing debt in 2020;
  • Extraordinary support to the Republic’s budget that has not been taken into account in this revision.

A negative rating action may be prompted by:

  • The Republic’s failure to achieve debt reduction parameters established by the agreement with the Ministry of Finance of Russia;
  • Growth of overdue accounts payable in 2019.

Issue ratings

Republic of Mordovia Government Bond, 2015 (ISIN RU000A0JVV49), maturity date: October 14, 2020, issue volume: RUB 3 bln — B(RU);

Republic of Mordovia Government Bond, 2016 (ISIN RU000A0JWSQ7), maturity date: September 3, 2021, issue volume: RUB 5 bln — B(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 – B(RU).

Regulatory disclosure

The credit ratings have been assigned to the Republic of Mordovia and the bonds (RU000A0JVV49, RU000A0JWSQ7) issued by the Republic of Mordovia 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 the 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 the credit ratings of the bonds (RU000A0JVV49, RU000A0JWSQ7) issued by the Republic of Mordovia were published by ACRA for the first time on November 8, 2017.

The credit rating of the Republic of Mordovia and its outlook as well as the credit ratings of the bonds (ISIN RU000A0JVV49, RU000A0JWSQ7) issued by the Republic of Mordovia are expected to be revised within 182 days following the publication date of this press release in compliance with the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were 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 ratings are solicited, and the Government of the Republic of Mordovia participated in their 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 Government of the Republic of Mordovia. No conflicts of interest were discovered in the course of credit rating assignment.

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