Training on sovereign risk credit analysis, October 24

ACRA affirms A(RU) to Kursk Region, outlook Stable, and A(RU) to bond issues

The credit rating of the Kursk Region (hereinafter, the Region) is based on a low debt load and a relatively high budget discipline. The rating is restricted by a medium development level of the regional economy.

The Kursk Region is located in the Central Federal District and borders Ukraine and five regions of Russia. 0.8% of Russia’s population live in the Region. The Region’s GRP amounted to 0.5% of the total GRP of Russia. The Region is part of the Central Black Earth Region. A part of the Kursk Magnetic Anomaly is located in the Region.

Key rating assessment factors

A low debt load coupled with a conservative debt policy and a comfortable debt repayment schedule. As of August 01, 2018, the Region's debt included restructured budget loans (59%), bonds (14%) and the short-term loan granted by the Office of the Federal Treasury (OFT) (27%). In case of need, the OFT loan can be replaced by a bank loan (the amount of disbursement limits available on August 01, 2018 exceeded the amount of the OFT loan). The relative debt load on the Region's budget projected by late 2018 is 77% of the operational balance (which corresponds to a low risk level). According to ACRA estimates, this figure will not grow significantly in 2019–2020. Interest payments and principal debt refinanced annually are not burdensome.

Budget discipline is supported by a sufficient share of own revenues and the federal government's support to the agricultural industry. The share of own revenues in the Region’s budget may average to 75% of the total revenues (excluding subventions) in 2015-2018. However, the relatively high share of capital expenditures and, correspondingly, the acceptable share of mandatory expenditures (71% on average in the mentioned period) are largely supported by federal subsidies for agricultural producers. The Region has no control over such subsidies, so that they do not constitute a reserve for cutting capital expenditures in favor of current expenses. Therefore, the high ratio of operating balance to regular revenues is largely supported by federal funds.

Moderate economic indicators restrict the rating. Amid a sufficient level of economic diversification and tax revenues (the manufacturing sector accounts for about 20%, agroindustry accounts for about 18%, and mining sector accounts for 8-11% of the annual GRP), the Region's GRP per capita and per capita income are low (about 68% and 85% of the national averages in the period from 2014 to 2017).

Key assumptions

  • The conservative debt policy will be maintained;
  • Federal support to the Region’s agribusiness will remain significant;
  • Federal transfers to the Region expected in 2019 and 2020 will be comparable to those received in 2016 and planned for 2018;
  • Mandatory budget expenditures will not exceed 75%.

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:

  • Growing share of products with high added value and outperforming GRP growth;
  • Higher number of manufacturers paying high wages, which would drive the average per capita income and tax revenues;
  • Growing budget liquidity.

A negative rating action may be prompted by:

  • Changes in the debt policy that increase public debt substantially;
  • Lower federal support to agroindustry, or changes in the proportion of subsidies from the federal and regional budgets.

Issue ratings

The Kursk Region, 35001 (ISIN RU000A0ZYCD1), maturity date: October 12, 2025, issue volume: RUB 4 bln (outstanding volume: RUB 1.3 bln) — А(RU).

Rationale. In ACRA’s opinion, the above bond issued by the Kursk Region is senior unsecured debt instrument, and its credit rating is equal to the rating assigned to the Kursk Region.

Regulatory disclosure

The credit ratings have been assigned to the Kursk Region and to bond issued by the Kursk Region (ISIN RU000A0ZYCD1) under the national scale for the Russian Federation based on the Methodology for Credit Rating 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 credit rating assignment to the above issue, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

For the first time, the credit rating of the Kursk Region and credit rating of government securities of the Kursk Region (ISIN RU000A0ZYCD1) were published by ACRA on September 1, 2017 and on October 10, 2017, respectively. The credit rating of the Kursk Region and its outlook as well as the credit rating of government securities issued by the Kursk Region (ISIN RU000A0ZYCD1) are expected to be revised within 182 days after the rating action date (August 29, 2018) in compliance with the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed based on the 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 data provided and the 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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