Training on sovereign risk credit analysis, October 24

ACRA affirms A-(RU) to Nizhny Novgorod, outlook Stable, and A-(RU) to bond issue

The credit rating assigned to Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is supported by comparably well-developed economy and effective liquidity management but limited by high debt load and relatively low flexibility of budget expenditures (the share of capital expenditures is high due to the support from higher-level budgets).

Nizhny Novgorod is the administrative center of the Nizhny Novgorod Region and the Volga Federal District. It stands fifth in Russia in terms of population (over 1.25 million people). Nizhny Novgorod is a major transportation hub of the Volga Federal District and one of the largest industrial centers of Russia.

Key rating assessment factors

The City’s economy rests upon its industrial potential and transport infrastructure. According to the estimates of the City Administration, in 2016, the contribution of the City to the gross regional product (GRP) of the Nizhny Novgorod Region was up to 50%. A half of goods, work and services is generated by the processing industries, and 40% of such goods are transport vehicles and equipment. Another 20% of shipped goods comes from the transport and communications sector. The economy of the City is diversified, as the share of the largest enterprises in Nizhny Novgorod accounts for not more than 10% of the shipped products.

The current indicators of budget discipline hinge on high capital expenditures, mostly supported by gratuitous transfers. The share of own revenues without subventions is quite high: 69% in 2015–2018 but, on the other hand, mandatory expenses amount to 79%. This prevents the City from maneuvering the budget and limits the operational balance to 13% of the regular revenue. More pressure comes from capital expenditures, although high, but financed mainly through transfers from higher-level budgets. ACRA believes that a possible decrease in the share of capital expenditures in the forecast period will be offset by an increase in the share of own revenues. A significant share of own revenues (8%) comes from a source regulated by regional legislation, according to which 3% of personal income tax to be transferred to the regional budget is transferred to the budgets of urban districts.

High debt load is aggravated by irregular maturities and lease obligations. A bond issue allowed the City Administration to improve the debt repayment schedule, but the operational balance, net of interest expenses, is still not enough to cover debt repayments, because only short-term bank loans are used to finance the shortage. This negative factor is offset by the effective liquidity management. The debt load of the City's budget is high: the debt-to-operating balance ratio was 2.68 at the end of 2017. In the forecast period, the ratio may increase due to declining operating balance on the backdrop of growing current expenses (including in the road infrastructure sector). The debt load is aggravated by the City’s obligations under vehicle lease contracts. ACRA categorizes such obligations as a direct debt load, but this debt is pre-planned and it influences the capital investments of the city budget, which is positively assessed by the Agency.

Key assumptions

  • In 2019–2020, capital expenditures will decline due to lower higher-level budget transfers;
  • The mandatory expenditures will grow in 2018–2019, amid higher share of own budget revenues.

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:

  • Higher tax revenues caused by increasing tax base, not accompanied by a corresponding increase in the mandatory budget expenditures;
  • Lower mandatory budget expenditures, provided that current tax revenues remain unchanged;
  • Longer maturities of new borrowings and smoother schedule of repayments.

A negative rating action may be prompted by:

  • Lower self-sufficiency of the budget caused by insufficiency of own revenues;
  • Changes in regional legislation (i.e. redistribution of personal income tax revenues in favor of the Nizhny Novgorod Region);
  • Growing interest expenses against the operating balance sheet of the City.

Issue ratings

Nizhny Novgorod Government Bond, 2017, RU34002NNV1 (RU000A0ZYJ00), maturity date: December 05, 2022, issue volume: RUB 5 bln — A(RU).

Regulatory disclosure

The credit ratings of Nizhny Novgorod and bond (ISIN RU000A0ZYJ00) issued by Nizhny Novgorod under the national scale for the Russian Federation were assigned and affirmed based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issue above, 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 Nizhny Novgorod and the credit rating of the bond (ISIN RU000A0ZYJ00) issued by Nizhny Novgorod were first published by ACRA on November 21, 2017 and November 29, 2017, respectively.

The credit rating of Nizhny Novgorod and its outlook, as well as the credit rating of the bond (ISIN RU000A0ZYJ00) issued by Nizhny Novgorod are expected to be revised within 182 days following the rating action date (May 18, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed based on the data provided by Nizhny Novgorod, 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 Administration of Nizhny Novgorod participated in the rating process.

Disclosure of deviations from the methodologies: to estimate the personal cash incomes in the City, the average nominal accrued salary was taken into account.

No material discrepancies between the provided data and the data officially disclosed by Nizhny Novgorod in its financial statements have been discovered.

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

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