Training on Forecasting, April 7–8

ACRA upgrades the Kursk Region to A+(RU), changes outlook to Stable, and upgrades bonds to A+(RU)

ACRA has upgraded the credit rating of the Kursk Region (hereinafter, the Region) based on a decrease in the Region’s debt load, as well as an increase in temporarily available funds amid growth in tax revenues. The Region’s conservative debt policy and relatively high budget discipline indicators support its credit rating, while average economic development limits it.

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

Key rating assessment factors

Conservative debt policy and balanced budget liquidity management. The Region adheres to a conservative debt policy, having maintained a low-risk debt load over the past four years. According to ACRA, the Region’s debt decreased from 18% to 15% of its current revenues in 2019 and consists of budget loans (56.5%) maturing 2034, bank loans (30.5%), and bonds (13%). The Region’s projected debt to current income ratio should remain at about 15% for 2020, which indicates a low level of risk. The ratio of the Region’s debt to tax and non-tax revenues (TNTR) for 2019 decreased from 23% to 20% and, according to ACRA, will not exceed 20% for 2020. This is significantly lower than the limit provided for in the budget loan restructuring agreements. Debt servicing costs are not burdensome for the Region’s budget due to the high share of budget loans in the debt structure (the average1 level of interest expenses in 2016-2020 should be less than 0.4% of total budget expenses, excluding subventions). Each year, the Region takes out short-term budget loans from the Federal Treasury in order to save on interest expenses. In 2020, the Region will need to repay 37% of its debt obligations. However, taking into account the Region’s low debt load, payments in absolute terms will be small and involve minimal refinancing risk. Despite the absence of open, unused credit lines with a repayment period of more than one year as of January 1, 2020, the Region has a sufficient amount of internal liquidity in order to meet its obligations in a timely manner. The account balances formed at the beginning of 2020 cover 94% of the debt obligations due this year.

1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

Moderately strong budget profile with moderate operational efficiency. The average share of the Region’s internal revenues in its total revenues (excluding subventions) should equal 76% in 2016-2020. The average ratio of the current account balance to current income for this period should amount to 8%, and the ratio of the average modified budget deficit to current income to 1%. These figures indicate that the Region’s current revenues are sufficient to cover current expenses and that there is no need to attract debt financing for capital expenses. The average share of capital expenses in total expenses (excluding subventions) stands at 17% in 2016-2020.

Moderate economic development limits the Region’s credit rating. Despite the sufficient level of economic diversification and tax revenues2, the Region’s GRP per capita is low and amounted to about 68% of the national average in 2014-2017. The ratio of average wages to the regional living wage in 2015-2018 was almost 300%, and the unemployment rate in the Region during this period was lower than the national average.

2 Iron ore production contributes the largest share of tax revenues, averaging 21% in 2016-2018.

Key assumptions

  • Maintaining a conservative debt policy;
  • Maintaining TNTR at 2019 levels in 2020;
  • Maintaining liquidity at a sufficient level. 

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Increased operational efficiency in the budget with no need to finance debt;
  • Continued growth in internal budget liquidity;
  • Increased growth rates in socio-economic development.

A negative rating action may be prompted by:

  • Decrease in available liquidity;
  • Growth in the debt to current revenues ratio above 30%;
  • Growth in current budget expenses with no increase in current revenues.

Issue ratings

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

Rationale. In ACRA’s opinion, the bond listed above is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Kursk Region.

Regulatory disclosure

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

The credit rating of the Kursk Region and the credit rating the bond issued by the Kursk Region (RU000A0ZYCD1) were published by ACRA for the first time 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 the bond issued by the Kursk Region (RU000A0ZYCD1) 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 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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