ACRA has upgraded the credit rating of the Krasnodar Krai (hereinafter, the Region) based on a decrease in the Region’s debt load, which is the result of early repayment by a public sector enterprise of liabilities that the Region provided a state guarantee on. The upgrade is also based on the reduced refinancing risk of the Region’s debt in the medium term. Stable budget indicators, the moderately high diversification of tax revenues, and the high level of the Region’s internal budget liquidity support the credit rating. The rating is limited by medium socioeconomic indicators.
The Region is 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 in Russia. It is also a large health resort destination and an important transportation hub.
Key rating assessment factors
Moderately low debt load with minimal refinancing risk. The ratio of the Region’s debt to current income declined from 57% for 2018 to 35% for 2019. This ratio could increase to 42% for 2020 as a result of a possible drop in tax and non-tax revenues (TNTR) because of the pandemic. According to ACRA, market debt, made up of bonds and bank loans with a comfortable repayment schedule, equaled 35% of the Region’s total debt as of January 1, 2020. Fifty nine percent of the debt was budget loans, most of which are due after 2023, while the remaining 6% was a guarantee issued by the Region for a public sector enterprise. ACRA then assessed the likelihood of payments on the guarantee as high. In February 2020, the obligations secured by the Region’s guarantee were fulfilled in full by the debtor ahead of schedule. The current debt repayment schedule (as of May 1, 2020) indicates minimal refinancing risk. In 2020-2022, the annual level of repayment (refinancing) does not exceed 10% of the Region’s total debt. Debt servicing costs are not burdensome for the regional budget (the averaged level1 of interest expenses in 2016-2020 should be below 2% of the total budget expenses, excluding subventions).
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
High budget liquidity. The Region fulfills its expense obligations in a timely manner. In November 2019, the Region started placing temporarily available funds in bank deposits. As of May 1, 2020, the regional budget’s account balances were 1.2x higher than the average monthly expenses for January-April 2020.
Self-sufficient budget with moderately high operating efficiency and growing tax revenues. The average share of TNTR in the Region’s total revenue (excluding subventions) in 2016-2020 should be more than 86%. The averaged ratio of balance of current operations to current income (according to ACRA’s methodology) for this period should be 14%, while the ratio of averaged modified budget deficit to current income should be 3%. These indicators show that current income is enough to cover current expenses and that there is no need to borrow funds in 2016-2020. Averaged capital expenses in 2016-2020 should amount to 13% of total budget expenses (excluding subventions). The Region finances capital expenses primarily with internal funds, which allows the Region to consider these expenses as a possible reserve for reducing expenses in the event of a decrease in regional budget revenues.
Diversified economy with economic indicators close to the national average. 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, and agriculture (the Region is a leader in Russia in terms of agricultural production). Additionally, manufacturing (including the food industry, whose growth prospects are determined by agricultural processing, and oil refining) and services also contribute greatly to the Region’s GRP. Tax revenues from this sector are uneven, which is due to the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The major share of tax revenues in the regional budget is generated by the wholesale and transport (including pipeline transport) sectors. According to ACRA, in 2016-2019, these sectors generated about 13% and 18% of the regional budget’s tax revenues, respectively. GRP per capita remains below the national average (72% in 2018). Unemployment in the Region fell from 6.0% in 2015 to 4.8% in 2019. In 2019, the average monthly salary in the Region exceeded the regional subsistence minimum by three times.
- Reduction in TNTR in 2020 no higher than 20% compared to 2019;
- Reduction in expenses if actual revenues are lower than planned revenues;
- Executing the 2020 budget with a deficit no higher than 10% of TNTR;
- Maintaining high internal liquidity.
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:
- Decrease in the debt to current income ratio below 30%;
- Increased flexibility of budget expenses;
- Reduction in the gap between the Region’s economic indicators and the national average.
A negative rating action may be prompted by:
- Decrease in the budget’s self-sufficiency;
- Increase in the debt to current income ratio above 50%;
- Decline in capital expenses below 10%;
- Significant decrease in budget liquidity.
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10 bln — АA-(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10 bln — АA-(RU).
Krasnodar Krai, 35003 (ISIN RU000A1011B5), maturity date: November 12, 2026, issue volume: 10 bln — АA-(RU).
Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Krasnodar Krai.
The credit ratings were assigned to the Krasnodar Krai and bonds issued by the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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 ratings of the bond issues (RU000A0ZZ8X4, RU000A1011B5) were first published by ACRA on October 17, 2018, and November 12, 2019, accordingly.
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, RU000A1011B5) are expected to be revised within 182 days following the publication date of this press release as per 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.