Training on Forecasting September 17–18

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

The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is a result of high debt load and effective liquidity management, relatively low flexibility of budget expenditures (the share of capital expenditures is high due to the support from higher-level budgets), and relatively high indicators of the economy.

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

High debt load is aggravated by irregular maturities and lease obligations. In 2018, the operating balance less interest expenses will not exceed the amount of debt repayments, since the City uses short-time bank loans to cover shortages. 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 will be about 2.5 by the end of 2018. The debt load is aggravated by the City’s obligations under motor 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.

Waning capital transfers will not lead to revaluation of budget discipline indicators. The share of own revenues without subventions is quite high: 67% in 2015–2018 but, on the other hand, mandatory expenses amount to 78%. This prevents the City from maneuvering the budget and limits the operational balance to 15% of regular revenues. More pressure came from capital expenditures, although high, but financed mainly through transfers from higher-level budgets. ACRA believes that, in the forecast period from 2019 to 2021, the share of capital expenditures will decrease to 12–15% against 19–29% in 2016–2018), as all projects related to the FIFA World Cup 2018 were completed this year. This structural change in the budget expenditures will be compensated by a growing share of own revenues, as the share of capital transfers will also decline. A part of own revenues comes from a source regulated by the regional legislation, according to which 3% of personal income tax due to the regional budget is transferred to the budgets of urban districts.

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 a shortage of own revenues;
  • Changes in the 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, 34002 (ISIN RU000A0ZYJ00), maturity date: December 05, 2022, issue volume: RUB 5 bln — A-(RU).

Rationale. In ACRA’s opinion, the above bond issued by Nizhny Novgorod is a senior unsecured debt instrument, and its credit rating is equal to the rating assigned to Nizhny Novgorod — 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 (November 15, 2018) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned 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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