The credit rating of the Krasnodar Krai (hereinafter, the Region) is based on the low risk of debt refinancing in the long-term and high budget liquidity. The rating is limited by the Region’s high debt load and limited flexibility in budget expenses. The outlook is based on the expectation that the Region will reduce its debt in the future.
The Region is a part of the Southern Federal District. The Region accounts for nearly 4% of Russia’s population and around 3% of the aggregate GRP of Russian regions. The Region is a consistent leader in terms of agricultural production. It is also a large health resort destination in Russia and an important transportation hub.
Key rating assessment factors
The Region’s well-balanced debt repayment schedule offsets the negative effects of its high debt load. According to ACRA, The Region’s debt to operating balance ratio should amount to 240% in 2019, remaining unchanged from a year before. This indicates heightened risk according to ACRA’s methodology. Market debt, including bonds and bank loans with a comfortable repayment schedule, should equal 50% of the Region’s total debt; 45% of the debt will be budget loans, most of which are due after 2023, while the remaining 5% is a guarantee issued by the Region for a public sector enterprise. ACRA assesses the likelihood of payments under the guarantee as high. The Region’s high debt load is offset by a smooth repayment schedule, which reflects the need for annual refinancing no higher than 20% of the current debt. As a result, the operating balance excluding interest expenses will be almost twice the amount of debt due each year in 2019–2021. Debt servicing costs are not burdensome (10% of the operating balance in 2019, according to ACRA). High levels of liquidity characterize the Region’s budget; as of June 1, 2019, account balances exceed average monthly expenses by 1.4x.
Budget figures are limited by a high share of expenditures that cannot be reduced. The share of proprietary budget revenues, excluding subventions, is high: it should amount to 87% for 2016–2019. The share of the Region’s mandatory expenses is quite high (78% for the above-mentioned period), while capital expenditures are low, averaging 13%. This restricts the rating in terms of the budget discipline and control assessment. Over the past five years, most of Region’s tax revenues has been provided by sectors like “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 equal 99% of the 2018 TNTR in 2019, with a deficit standing at 3.6% of total budget revenues (RUB 9.1 bln), which is financed with account balances. However, ACRA expects that under the current macroeconomic conditions the Region’s TNTR could grow at rates no lower than the inflation rate (4.8% according to ACRA) in 2019. For the four months of 2019, TNTR increased 16% compared to the indicator for the same period in 2018.
Diversified economy with economic indicators close to national averages. The major share of the Region’s GRP is generated by sectors like transport and communications (large pipelines run across the Region), trade and repairs, agriculture (the Region is a leader in Russia in terms of agricultural production), manufacturing (including the 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;
- Maintaining high budget liquidity;
- Taking out and repaying loans in 2019-2021 in accordance with the current version of the regional budget law;
- Maintaining capital expenditures higher than 15% in the medium-term;
- Compliance 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:
- Implementing measures aimed at reducing debt;
- Decreased relative debt burden;
- Completion of the period during which the Region must provide guarantees to the public sector enterprise;
- Increased flexibility of budget expenses.
A negative rating action may be prompted by:
- Decreased proprietary revenues by 5% or more from the levels forecasted by ACRA for 2019;
- Decrease in the budget’s self-sufficiency;
- Increase in debt to operating balance ratio above 300%;
- Decline in capital expenses below 10%.
Issue ratings
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10.0 bln — А(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10.0 bln — А(RU).
Credit rating rationale. In ACRA’s opinion, the above bonds issued by the Krasnodar Krai are senior unsecured debt instruments, and their credit ratings are equal to the rating assigned to 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 the 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.
The credit rating of the Krasnodar Krai and credit rating of the government securities of the Krasnodar Krai (RU000A0JXYS9) were published by ACRA for the first time 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 solicited, 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.
