Training on Forecasting September 17–18

ACRA affirms BBB(RU) to Bratsk, outlook Stable

The credit rating assigned to Bratsk (hereinafter, Bratsk, or the City) is based on strong industrial sector ensuring sustainable tax revenues of the budget as well as high share of partially restructured budget loans in the debt portfolio, which reduced debt servicing costs. At the same time, moderate self-sufficiency of the budget, low flexibility in managing budget spending and low capital expenditures financed by the city budget have a negative effect on the rating.

Bratsk is located in the Irkutsk Region (Siberian Federal District); the City’s population is 231,000 people. Large industrial facilities are located in the City: Bratsk Branch of Ilim Group (pulp and containerboard mill), Bratsk Aluminium Smelter (PJSC RUSAL Bratsk), Bratsk Ferroalloy Plant (Mechel PAO), and Bratsk Hydroelectric Power Station (PAO Irkutskenergo).

Key rating assessment factors

Self-sufficiency of the budget’s revenue side has remained moderate, with low flexibility in managing budget spending and low own capital expenditures. The City’s budget has a moderate self-sufficiency: the share of tax and non-tax revenues (TNTR) in the budget’s revenues declined from 44% to 33% in 2015–2017. Although the degree of control over spending is sufficient (mandatory spending has grown from 45% in 2015 to 57% in 2017), the flexibility in managing budget spending is relatively low, as a substantial part of spending is financed by funds of the federal and regional budgets. The actual operating balance was 3.9% in 2017, which is assessed by ACRA as a critical level where debt cuts or payment of unexpected expenses are impossible without raising external financing. The level of capital expenditures directly financed from the city budget averaged 4.3% of the total spending in 2014–2017.

Budget loans have been restructured to extend the debt repayment schedule; however, in the mid-term, bank loans will need to be refinanced. In April 2018, budget loans (RUB 186 million or 24% of debt portfolio as of late 2017) have been restructured to make the debt repayment schedule more comfortable and to cut debt service costs. However, the debt load of Bratsk is critical owing to the low operating balance. The City will need to refinance 100% bank loans (50% of the debt portfolio) in 2019–2020. The City's capacity to reduce the debt load independently is limited by weak generation of tax and non-tax revenues.

Sufficient liquidity and control over cash expenses. Intra-year cash gaps are closed by bank loans and Federal Treasury loans (capped by RUB 190 million for 2018). Considering available resources and strict control over cash expenses of the budget, ACRA assesses the City’s liquidity as sufficient.

Key assumptions

  • Stable financial position of large enterprises in Bratsk;
  • High employment;
  • Maintaining the current share of regional budget’s financing in the city budget spend;
  • Maintaining the current loan portfolio structure.

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 revenues of the City’s budget by virtue of increased share of tax and non-tax revenues;
  • An increase of the operating balance above 5%;
  • Refinancing bank loans for a period exceeding three years.

A negative rating action may be prompted by:

  • A significantly lower operating balance;
  • Substantially increased debt servicing costs versus the operating balance;
  • A substantial drop in capital expenditures; 

Issue ratings

None.

Regulatory disclosure

The credit rating was assigned to Bratsk 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.

The credit rating of Bratsk was first published by ACRA on November 21, 2017. The credit rating and its outlook are expected to be revised within 182 days following the rating action date (May 18, 2018) in accordance with the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by Bratsk Administration, 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 rating is solicited, and the Bratsk Administration participated in its assignment.

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

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

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