ACRA upgrades the Samara Region’s rating to A+(RU), outlook Stable, and RU35013SAM0 bond rating to A+(RU)

ACRA upgraded the credit rating of the Samara Region (the Region) in view of a material improvement in the Region’s debt burden and budget liquidity.

The Region is located in the Volga Federal District and ranks 11^th in the Russian Federation by the gross regional product (GRP). The Region’s population is 3.2 mln, 2.6 mln of which reside in the Samara-Togliatti metropolitan area that ranks third in the RF by population after those of Moscow and St. Petersburg.

Key rating assessment factors

Lower debt burden. Growing operational balance in 2015–2017 results in considerable reduction (by 44%) of the debt to operational balance ratio. This year the Region is successful in saving funds allocated for debt service, with bank loans being partially prepaid or replaced with budgetary loans, and interest rates on previous bank loans going down.

Higher budget liquidity. From May 2016 to June 2017, the budget account balances covered averagely 96% of next-month expenses, while within the last eight out of fourteen months the balances exceeded future monthly expenses. The Region places certain free funds on deposits, which gives assitional earnings (in 2016, the interest income was 11.4% of the debt service expense).

Stable budget. Budget revenues are high, based on a sustainable and diversified tax base: average profit tax collections accounted for 35% of the tax and non-tax budget revenues and personal income tax collections amounted to 30%. In 2016, the regular income growth rate of +4.8% exceeded the obligatory expenses growth rate of +1.2%, which lessened the pressure on the operational balance. ACRA expects that this trend will continue in 2017. A higher share of the federal government in the profit tax earnings had no negative effects on the Region’s budget: in the first four months of 2017 the profit tax collections grew by 16% against the same period of 2016.

Well-diversified economy. The Region’s economy hinges on its well-diversified industrial base (24% of GRP) dominated by automotive, chemical, food, and metal products industries. Well-developed industrial, services and agriculture sectors ensure low unemployment. Products made in the Region are in demand on both the federal and international markets (exports amount to about 30% of GRP), which increases the resilience of the regional economy to external shocks. However, the average per capita income and the GRP per capita continue to lag behind the Russian average by 13%.

Well-balanced debt portfolio free of material risks. With long-term bond-secured loans dominating the Region’s liabilities (55% as of June 16, 2017), the budget is well-protected from the refinancing risk and the risk of increased debt costs. In 1H2017, the Region has replaced bank loans (due in 2018–2019) with newly issued 7-year bonds and budget loans (due in 2022), which improved the temporal debt structure.

Key assumptions

• Maintaining the current industrial output rate;
• Own revenues exceeding mandatory expenditures;
• Stable social spendings structure;
• Further maintaining the proactive liquidity management policy.

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:

• Leveling of specific regional GRP values and household incomes with the national averages;
• Operating balance increase by way of boosting own revenues.

A negative rating action may be prompted by:

• Lower industrial output due to deteriorating market conditions.
• Increase of mandatory expenses share in the budget structure.

Issue ratings

In ACRA’s opinion, bond (RegS RU35013SAM0, ISIN RU000A0JXT41) issued by the Samara Region is a senior unsecured debt, and its credit rating is equal to that of the Samara Region.

Issue highlights

he credit ratings were assigned to the Samara Region and the bonds (RegS RU35013SAM0, ISIN RU000A0JXT41) issued by the Samara Region under the national scale for the Russian Federation in accordance with the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The issuer credit rating was first assigned to the Samara Region on December 27, 2016. The issuer credit rating and outlook were revised on June 27, 2017. The issuer credit rating and outlook are expected to be next revised within 182 days of the last rating action in accordance with the 2017 Calendar of Planned Sovereign Rating Revisions and Publications.

The issue credit rating was first assigned to bonds (RegS RU35013SAM0, ISIN RU000A0JXT41) issued by the Samara Region on June 5, 2017. The credit rating was revised on June 27, 2017. The rating is expected to be revised within 182 days of the rating action in accordance with the 2017 Calendar of Planned Sovereign Rating Revisions and Publications.

The credit ratings were assigned based on the data provided by the Samara Region, information from open sources (the Ministry of Finance of the Russian Federation, the Federal State Statistics Service, the Federal Tax Service). The credit ratings are solicited, and the Samara Region participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by the Samara Region in its financial statements have been discovered.

ACRA provided no additional services to the Samara Region. No conflicts of interest were discovered in the course of credit rating assignment.