The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is based on the City’s relatively high economic development, unevenly distributed debt repayment schedule, and limited flexibility of budget expenses.
Nizhny Novgorod is the administrative center of the Nizhny Novgorod Region and the Volga Federal District (VFD). It is Russia’s fifth largest city, with a population of over 1.25 million. Nizhny Novgorod is a major transportation hub of the VFD and one of Russia’s largest industrial centers.
Key rating assessment factors
Unevenly distributed debt repayment schedule. At the end of 2020, the City’s debt load should amount to up to 50% of its current income (90–93% of tax and non-tax revenues, TNTR). The substantial difference between these indicators is due to a large amount of revenues represented by transfers, which are traditionally typical of municipal budgets.
The debt repayment schedule is uneven due to the regular use of short-term bank loans. As of the rating analysis, bank loans, which are all due in 2021, accounted for 40% of Nizhny Novgorod’s total debt. A further 43% of debt was made up of bonds, 12% was a loan from the Federal Treasury Department (FTD), and the remaining share comprised budget loans. Consequently, a significant volume of debt (63%) is subject to repayment (refinancing) in 2021.
The current version of the Resolution on the City’s Budget envisages the placement of a bond. ACRA expects that this will reduce refinancing risks and optimize the debt repayment schedule.
Interest expenses are not burdensome: annual payments are at or below 4% of expenses, excluding subventions.
To purchase public transport vehicles, Nizhny Novgorod usually enters into lease agreements, which can be viewed as indirect debt load. Obligations of municipal enterprises and organizations do not create substantial load on the City’s budget.
Sufficient liquidity. So far, in 2020 Nizhny Novgorod’s average monthly budget account balances have been insufficient to cover its monthly expenses to a significant extent. As of the beginning of 2020, account balances were also not sufficient to cover the debt due in 2020.
However, available liquidity is sufficient to cover planned expenses thanks to the use of funds from the FTD and municipal organizations that belong to the City.
The City replaces borrowings with cheaper funding sources to save on interest expenses.
Limited flexibility of budget expenses due to dependence on transfers. The averaged1 share of TNTR (excluding subventions) for 2017–2021 will equal 66%. The largest contributors to the City budget are personal income tax (up to half of TNTR). For seven months of 2020, income tax revenues amounted to 101% of revenues for the same period last year. A significant share of other internal revenues is contributed by property tax and rental revenues. Since October 2019, 20% of the tax collected as part of the simplified taxation scheme is transferred to the City budget. In view of this fact, total income tax revenues will more than double in 2020 and will be close to the amount of property tax revenues.
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
The current operations balance to current income ratio will total 7% in 2020. The averaged ratio for 2017–2021 will stand at 9%.
The City’s capital expenditures are traditionally very high, totaling 41% of expenses (excluding subventions) in the above period. However, higher-level budgets finance the bulk of these expenditures.
Relatively high level of economic development. Nizhny Novgorod is one of the largest industrial centers in the VFD. The average accrued nominal wage covering all entities in the City is almost four times higher than the subsistence minimum in the Nizhny Novgorod Region. Unemployment calculated according to the International Labour Organization’s methodology is low in the Nizhny Novgorod Region.
Key assumptions
- Stable budget policy of the Nizhny Novgorod Region in terms of distribution of income tax revenue;
- Further conclusion of leasing contracts to finance the development of the City’s transport infrastructure.
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:
- Higher tax revenues caused by an increase in the tax base;
- Raising new loans with longer maturities.
A negative rating action may be prompted by:
- Lower budget self-sufficiency caused by a shortage in internal revenues;
- Changes in regional legislation with regard to redistribution of personal income tax revenues and part of the tax levied in connection with the simplified taxation system in favor of the Nizhny Novgorod Region;
- Higher debt load.
Issue ratings
Nizhny Novgorod, 34002 (ISIN RU000A0ZYJ00), maturity date: December 5, 2022, issue volume: RUB 5 bln — A-(RU).
Rationale. In ACRA’s opinion, the bond listed above issued by Nizhny Novgorod is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of Nizhny Novgorod, i.e. A-(RU).
Regulatory disclosure
The credit ratings were assigned to Nizhny Novgorod and the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00) 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 the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of Nizhny Novgorod and the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00) were published by ACRA for the first time on November 21, 2017, and November 29, 2017, respectively.
The credit rating of Nizhny Novgorod and its outlook, as well as the credit rating of the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00), 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 Nizhny Novgorod, 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 Administration of Nizhny Novgorod participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by Nizhny Novgorod in its financial statements have been discovered.
ACRA provided no additional services to the Administration of Nizhny Novgorod. No conflicts of interest were discovered in the course of credit rating assignment.
