Training on sovereign risk credit analysis, October 24

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

The credit rating of the Belgorod Region (hereinafter, the “Region”) is determined by stable budget indicators, well-balanced debt load in terms of repayment dates and structure, federal support of the agricultural industry, and high level of infrastructure.

The Region produces approximately 40% of the Russian iron-ore concentrate. The climate is favorable for non-cyclic industries, including agricultural and food industries, which is positive for the diversification of the regional economy that depends on the mining sector.

Key rating assessment factors

Higher tax revenues in 2017 were applied to finance both mandatory and capital expenditures. In 2017, the tax revenues of the Region grew (driven mainly by the metals sector where loss write-off was limited), which increased the dependence of budget revenues on the related sectors, including iron ore mining and metal production. According to ACRA estimates, in 2017, up to 36% of the tax revenues of the regional budget came from those sectors (17% a year earlier). The revenue growth was accompanied by an increase in both mandatory and capital expenditures (in the road sector mainly). The volume of tax revenues planned for 2018–2020 will allow the Region to maintain a relatively high level of capital expenditures and a high ratio of operating balance to regular revenues, while the gradual increase in mandatory expenses is compensated by the increasing share of the Region's own revenues.

Well-balanced debt in terms of repayment dates and structure puts no excess pressure on debt load indicators. Debt loan estimates correspond to low risk category due to a relatively high operating balance and a comfortable debt repayment schedule. ACRA is of the opinion that the Region will perform its obligations under the budget loan restructuring agreements, decreasing the volume of guarantees (as of May 1, 2018, such guarantees account for 17% of the debt, but they will expire with time and new guarantees will be issued in minimal volumes).

Sufficient liquidity. The Region’s Government has no legal right to hold deposits with banks; it has, however, a sufficient level of liquidity to perform its expenditure obligations in a timely manner, including interest payments. Since 2017, current month expenses have exceeded cash balances on budget accounts as at month start.

Key assumptions

  • Maintaining dependence of the Region’s economy on the dynamics of its key industries;
  • Maintaining significant federal support of the Region’s agribusiness sector;
  • Maintaining well-balanced debt management policy by mainly raising long-term debt with regular amortization schedule.

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:

  • Stabilizing profit tax revenues, excluding temporary limitation of loss set-off;
  • Better debt load indicators on the banck of growing operating balance and/or decreasing volume of guarantees issued;
  • Increased share of higher added value agricultural products.

A negative rating action may be prompted by:

  • Substantially lower support of agricultural enterprises by federal budget resulting in higher regional budget expenses;
  • Changes in debt management policy and time structure of the debt;
  • Higher debt service costs.

Issue ratings

The Belgorod Region, 35011 (ISIN RU000A0JXTW1); maturity date: June 11, 2024; issue volume: RUB 4 bln.

Rationale. ACRA is of the opinion that the bond issued by the Belgorod Region has a status of senior unsecured debt. Credit rating of this debt instrument corresponds to the credit rating of the Belgorod Region.

Regulatory disclosure

The credit ratings of the Belgorod Region and bond issued by the Belgorod Region (ISIN RU000A0JXTW1) have been assigned 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 course of assigning a credit rating to the bond issue above, Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

For the first time, ACRA published the credit rating of the Belgorod Region and the credit rating of the government bond of the Belgorod Region on June 13, 2017 and June 19, 2017, respectively. The credit rating of the Belgorod Region and its outlook and the credit rating of the government bond of the Belgorod Region are expected to be revised within 182 days following the rating action date (June 6, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Belgorod Region, information from publicly available sources (the RF 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 Belgorod Region participated in their assignment.

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

ACRA provided no additional services to the Government of the Belgorod Region. No conflicts of interest were discovered in the course of credit rating assignment.

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