The credit rating of the Magadan Region (hereinafter, the Region) is based on its high debt load, low economic diversification and low operating balance. The high cost of living coupled with the need to import most goods, as well as little effect of the gold mining sector (the core of the Region’s economy) on other industries, limit the development of the regional economy.
The Magadan Region is located in the Far East Federal District. The Region is part of the Far North Territory. 0.1% of the Russian population live in the Region with its GRP accounting for roughly 0.2% of Russia’s aggregate GRP in 2017. The Region produces over 10% of the total volume of gold mined in Russia, and nearly 60% of Russia’s silver.
Key rating assessment factors
Heightened level of credit risk due to high debt load. At the end of 2018, the Region’s total debt rose by 7% (RUB 950 million). The ratio of debt to the Region’s operating balance exceeded 7x in 2018, while the ratio of debt service costs to operating balance amounted to 39%. These figures are due to a significant decrease in the operating balance in 2018. In 2019, ACRA expects it to grow to the 2017 level, which is why the ratio of debt to operating balance will be less than 5x, and the ratio of debt service costs to operating balance will total around 30%. As of April 1, 2019, bank loans account for 47% of the Region’s debt, budget loans — 35%, loans of the Federal Treasury Department (FTD) — 12%, and bonds — 7%. The Region’s debt repayment schedule is uneven and depends on the share of bank loans as of the end of the year. The peak of payments is in 2021. Limited access to external sources of liquidity and the need to replace FTD loans may lead to a liquidity deficit by the end of 2019.
In assessing the Region’s debt load, the Agency assumes that several violations of the terms of budget loan restructuring with the Ministry of Finance of the Russian Federation, committed in 2018, will not lead to a prepayment of part of the debt in 2019 due to the change of the senior official in the Region. ACRA believes that the failure to fulfill own budget revenues by 0.5% and more of the planned level for 2019 with the impossibility to reduce expenditures can once again lead to the failure to fulfill the terms of restructuring. However, the prepayment of the amount in excess of limit values of the public debt volume and its replacement by market debt will not have a significant impact on the Region’s credit rating in the short term.
The Agency also points to a substantial increase in overdue accounts payable, which entails potential risks of a growth in the Region’s debt load.
Low indicators of budget discipline are due to low economic diversification and high cost of living. The mining industry (the Region’s leading sector) accounts for nearly 45% of the regional budget’s tax revenues. The Region’s average per capita income exceeds the national average by 1.7 times, but high prices, which are due to climate and logistics costs, do not allow to have a significant effect for the population. This causes a constant migration outflow (since 2005, the Region’s population has decreased by almost 20%). The regional budget depends on federal transfers: the share of own budget revenues (excluding subventions) will average 68%1 in 2016–2019. At the same time, the share of mandatory expenditures in the budget is very high (82% during the above-mentioned period), and the share of capital expenditures is low (on average, 6% in 2016–2019). In 2018, the Region’s operating balance decreased (due to non-fulfillment of the planned volume of capital expenditures), but in 2019 it is expected to recover to the 2017 level.
1 Budget indicators were analyzed excluding the transfers from RusHydro PJSC in 2017–2020 under the program aimed at the attainment of base tariffs in the Far East Federal District.
Key assumptions
- Execution of the 2019 budget with a deficit of around 2% of tax and non-tax revenues (TNTR);
- Growth of tax revenues at a pace not lower than the inflation rate;
- Fulfillment of the planned capital expenditures in 2019.
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:
- Growth of tax revenues compared to the 2018 level without an equivalent growth of mandatory expenses;
- Decline in debt load;
- Decrease in overdue accounts payable;
- Increase in the Region’s own liquidity.
A negative rating action may be prompted by:
- Violation of the terms of budget loan restructuring, entailing budget loan enforcement procedures, other than prepayment of the amount in excess of limit values of the public debt volume;
- Execution of the 2019 budget with a deficit exceeding 2% of own revenues;
- Increase in necessary expenses of the Region’s budget, not supported by the growth of budget revenues, and a decrease in capital expenditures lower than the average figure for the period between 2015 and 2018.
Issue ratings
Magadan Region, 35001 (ISIN RU000A0ZYL48), maturity date: December 25, 2022, issue volume: RUB 1 bln — BBB-(RU).
Credit rating rationale. In ACRA’s opinion, the above bonds issued by the Magadan Region are senior unsecured debt instruments, which credit rating is equal to that assigned to the Magadan Region.
Regulatory disclosure
The credit ratings were assigned to the Magadan Region and bonds issued by the Magadan Region (RU000A0ZYL48) 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 Magadan Region and credit rating of the government securities of the Magadan Region (RU000A0ZYL48) were published by ACRA on April 26, 2018.
The credit rating of the Magadan Region and its outlook as well as the credit rating of the government securities issue of the Magadan Region (RU000A0ZYL48) 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 Magadan 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 Magadan Regional Government participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by the Magadan Region in its financial reports have been discovered.
ACRA provided no additional services to the Magadan Regional Government. No conflicts of interest were discovered in the course of credit rating assignment.
