The credit rating of the Krasnodar Krai (hereinafter, the Region) is based on low debt refinancing risk in the long-term and high budget liquidity. The rating is limited by high debt load and limited flexibility of budget expenditures. The outlook on the credit rating of the Region has been changed due to expectations that the Region will continue to implement measures aimed at reducing its debt.
The Region is a part of the Southern Federal District. Nearly 4% of Russia’s population live there, and around 3% of the aggregate GRP of Russian regions is generated in the Region. The Region is a consistent leader among Russian regions in terms of agricultural production. It is also a large Russian health resort and an important transportation cluster.
Key rating assessment factors
Well-balanced debt repayment schedule offsets negative effects of high debt load. By the end of 2018, the ratio of the Region’s debt to operating balance totaled around 240%, which is a heightened level of risk, according to the ACRA methodology. According to ACRA estimates, this ratio may grow insignificantly by late 2019 since the Agency expects a decline in the Region’s operating balance to surpass an expected decrease in its debt in 2019. In 2018, the Region’s debt fell by RUB 9 bln (down by 6%) to RUB 140 bln; the regional budget law for 2019-2021 stipulates a further annual decline in debt down to RUB 126 bln by the end of 2021. Market debt, including bonds and bank loans with a comfortable repayment schedule, will be about 48% of the total debt at the end of 2019; 43% of the debt will be budget loans, most of which are due after 2023. The remaining 9% is a guarantee issued by the Region for a public sector enterprise. The likelihood of annual payments under the guarantee is assessed by ACRA as high. High debt load is offset by a smooth repayment schedule, which reflects the need for annual refinancing not exceeding 20% of the current debt. As a result, the operating balance less interest expenses will be almost twice the amount of debt due in each year in 2019–2021. The debt servicing costs are not burdensome (10% of the operating balance in 2019, according to ACRA estimates).
High share of expenditures that cannot be cut down restricts budget indicators. The share of own budget revenues, excluding subventions, is high: in 2016–2019, it will amount to 87%. The share of the Region’s mandatory expenditures is quite high (78% in the above mentioned period), while capital expenditures are low (on average, 13%), which restricts the rating as far as the “budget discipline and control” assessment factor is concerned. Over the past five years, the largest share of regional budget tax revenues has been provided by such sectors as “Trade and Repair” and “Transport and Communications” (particularly, pipeline transportation): on average, 19% and 17% respectively. Under the regional budget law, tax and non-tax revenues (TNTR) are expected to amount to 99% of the 2018 TNTR in 2019, with a deficit seen at 3.6% of total budget revenues (RUB 9.1 bln), which is financed through the account balances. However, ACRA expects that under the current macroeconomic conditions the Region’s TNTR may grow at a rate not lower than the inflation rate (4.8%, according to ACRA estimates) in 2019.
Diversified economy; economic indicators close to the national average. The major share of the Region’s GRP is generated by such sectors as transport and communications (large pipelines run across the Region), trade and repairs, agriculture (the Region is a leader among Russian regions in terms of agricultural production), manufacturing (including food industry and oil refining), and services. Tax proceeds by sector are uneven, which is caused by the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The per capita cash income and unemployment rate have been close to the national average, while the per capita GRP has been consistently below the national average by 20%.
Key assumptions
- An increase in the Region’s TNTR in 2019 compared to 2018 given the inflation rate in Russia at 4.8% as forecasted by ACRA;
- The budget liquidity will remain high;
- Attraction and repayment of the Region’s loans in 2019-2021 in accordance with the current version of the regional budget law;
- Capital expenditures will remain at no less than 15% in the medium term;
- The Region will comply with the budget loan restructuring agreements.
Potential outlook or rating change factors
The Positive outlook assumes that the credit rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The implementation of measures aimed at reducing debt;
- A decrease in the relative debt burden;
- The completion of a period when the Region’s guarantee issued in favor of a public sector company is active;
- Increased flexibility of budget expenditures.
A negative rating action may be prompted by:
- A decrease in the Region’s own revenues by 5% or more from the levels forecasted by ACRA for 2019;
- A lower self-sufficiency of the Region’s budget;
- Ratio of debt to operating balance of the Region growing above 300%;
- A decline in the share of capital expenditures in the Region’s budget below 10%.
Issue ratings
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10 bln — uА(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10 bln — uА(RU).
Credit rating rationale. In ACRA’s opinion, the above mentioned bonds issued by the Krasnodar Krai are senior unsecured debt instruments, and their credit rating is equal to that of the Krasnodar Krai.
Regulatory disclosure
The credit ratings were assigned to the Krasnodar Krai and bonds issued by the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4) 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 issues, 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 Krasnodar Krai and credit ratings of the government securities of the Krasnodar Krai (RU000A0JXYS9) were published by ACRA on October 18, 2017. The credit rating of the bond issue (RU000A0ZZ8X4) was first published by ACRA on October 17, 2018.
The credit rating of the Krasnodar Krai and its outlook as well as the credit ratings of the government securities issues of the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4) are expected to be revised within 182 days following the publication date of this press release in compliance with the Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned based on data provided by the Krasnodar Krai, 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 unsolicited, and the Krasnodar Krai Administration participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by the Krasnodar Krai in its financial reports have been discovered.
ACRA provided no additional services to the Krasnodar Krai Administration. No conflicts of interest were discovered in the course of credit rating assignment.
