ACRA affirms A+(RU) to the Kursk Region, outlook Stable, and A+(RU) to bond issue

The credit rating of the Kursk Region (hereinafter, the Region) is based on the Region’s low debt load and moderately high budget profile. The rating is limited by the Region’s average level of economic development.

The Region is a part of the Central Federal District and borders five other administrative regions of Russia as well as Ukraine. 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 amounted to 15% of its current revenues in 2019 and consists of budget loans (56.5%) maturing 2034, bank loans (30.5%), and bonds (13%). In ACRA’s scenario, which assumes the reduction of the Region’s tax and non-tax revenues (TRTR) by 15% in 2020 compared to 2019 as well as their growth in 2021 by 10%, the debt load will not exceed 30% of operating revenues by the end of 2021, indicating a low level of risk. 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 2017-2021 should be 0.5% 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. The Region has a sufficient amount of internal liquidity in order to meet its obligations in a timely manner and it has a revolving credit line of RUB 1 bln, which is due in 2021, at its disposal. The account balances formed at the beginning of 2020 cover 94% of the debt obligations repaid this year.

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 77% in 2017-2021. The average ratio of the current account balance to current income for this period should amount to 6%, and the ratio of the average modified budget deficit to current income could be negative at -2.8% (as a result of a possible decrease in TNTR in 2020−2021 compared to planned levels due to the pandemic). These figures indicate that the Region’s current revenues are enough to cover current expenses and that there may be a need to attract debt financing for capital expenses. The average share of capital expenses in total expenses (excluding subventions) stands at 17% in 2017-2021.

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 67% of the national average in 2015−2018. Wages exceeded the regional subsistence minimum in 2019 by more than three times, and the unemployment rate in the Region in this period was lower than the national average.

1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
2 Iron ore production contributes the largest share of tax revenues, averaging 23% in 2016-2019.

Key assumptions

  • Maintaining a conservative debt policy;
  • Decreased expenses if actual revenues are lower than planned;
  • 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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