The credit rating assigned to the Lipetsk Region (hereinafter, the Region) is based on a stably high level of self-sufficiency of the budget, buoyed by the growth of tax revenues on profit tax from metallurgical enterprises on the back of a long period of high metal prices. A high degree of liquidity and low debt burden also supported the rating. According to ACRA estimates, the Region’s low economic diversification puts pressure on the rating.
The Region is located in the Central Federal District, bordering six other regions. In total, 1.1 million people live in the Region, which gross regional product (GRP) was RUB 499 billion in 2017.
Key rating assessment factors
Balanced debt structure. According to ACRA estimates, the Region’s state debt could decrease by at least 2% by the end of the year. The debt to operating balance ratio will not exceed 0.8 at the end of 2018, and debt service costs will not surmount 3% of the operating balance, which corresponds to a low level of credit risk. ACRA believes that the debt burden on the regional budget will remain within the limits corresponding to the low level of credit risk in 2019.
As of December 1, 2018, the Lipetsk Region’s total debt stood at RUB 15 billion. It is largely represented by bonds (39% of debt), bank loans (17% of debt) and budget loans (43% of debt). The amount of state guarantees issued is insignificant.
As of November 1, 2018, budget account balances covered more than 70% of the total debt. Its largest part (70.9%) is repayable in 2019-2022 with the remaining 29.1% maturing in 2023-2034. By the date of the rating’s planned revision (December 18, 2018), the Region had paid off the entire amount of debt for 2018. The issue of bonds by the Lipetsk region in October, 2018, made it possible to refinance part of the debt for a longer period.
Budget indicators have improved. ACRA forecasts that the regional budget will be executed with a surplus in 2018, and budget revenues will grow by around 10% compared to the previous year. ACRA points to the positive dynamics of budget indicators: in the first ten months of the year, the amount of tax and non-tax revenues increased by 20% compared to the same period last year with expenditures rising by just 2%. The growth of tax and non-tax revenues is due to an increase in income tax revenues from companies in the metallurgical sector. According to ACRA estimates, the average share of budget capital expenditures is seen at 23%.
- Control over mandatory budget expenditures;
- Maintenance of high liquidity.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely change within the 12 to18-month horizon.
A positive rating action may be prompted by:
- Budget implementation with a surplus of over 1% of tax and non-tax revenues in 2018;
- Lower debt to operating balance ratio.
A negative rating action may be prompted by:
- Significant decline of the operating balance;
- Considerable growth of the debt burden and debt service costs.
Lipetsk Region Government Bond, 2018, 35010 (ISIN RU000A0ZZR33), maturity date — October 21, 2025, issue volume — RUB 3 bln, — АА-(RU);
Lipetsk Region Government Bond, 2013, 35008 (ISIN RU000A0JTVZ8), maturity date — April 17, 2020, issue volume — RUB 3 bln, — АА-(RU);
Lipetsk Region Government Bond, 2014, 34009 (ISIN RU000A0JUNK5), maturity date — June 4, 2019, issue volume — RUB 5 bln, — АА-(RU).
Credit rating rationale. In ACRA's opinion, the above bonds are senior unsecured debt instruments, and their credit ratings are on par with the rating of the Lipetsk Region.
The credit ratings were assigned to the Lipetsk Region and the bonds (ISIN RU000A0ZZR33, RU000A0JTVZ8, RU000A0JUNK5) issued by the Lipetsk Region 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. To assign credit ratings to the bond issues above, ACRA also used the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.
The credit ratings assigned to the Lipetsk Region and the bonds (ISIN RU000A0ZZR33, RU000A0JTVZ8, RU000A0JUNK5) issued by the Lipetsk Region were first published by ACRA on July 7, 2017, October 24, 2018, July 12, 2017, and July 12, 2017, respectively. The credit rating of the Lipetsk Region and its outlook and the credit ratings of the bonds (ISIN RU000A0ZZR33, RU000A0JTVZ8, RU000A0JUNK5) issued by the Lipetsk Region are expected to be revised within 182 days following the rating action date (December 18, 2018) as per the Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned based on the data provided by the Administration of the Lipetsk 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 Administration of the Lipetsk Region participated in their assignment.
No material discrepancies between the data provided and the data officially disclosed by the Administration of the Lipetsk Region in its financial report have been discovered.
ACRA provided no additional services to the Administration of the Lipetsk Region. No conflicts of interest were discovered in the course of credit rating assignment and affirmation.