ACRA assigns A(RU) to the Orenburg Region, outlook Stable, and A(RU) to bond issues

The credit rating assigned to the Orenburg Region (hereinafter, the Region) is based on a safe level of debt load versus the operating balance amid moderate economic development as compared to the national average figures and significant dependence of economic and fiscal indicators on the dominant industry (hydrocarbon production) as well as on high self-sufficiency of the budget with a substantial share of mandatory spending.

The Orenburg Region is located in the Volga Federal District at the crossroads of two continents, Europe and Asia. The Region borders five regions of Russia, and Kazakhstan. 1.3% of the Russian population live in the Region; it accounts for 1.2% of the total GRP of Russia.  The Region produces around 3% of the Russian crude oil and gas annually.

Key rating assessment factors

Resource-oriented economy with moderate per capita development indicators. The foundation of the Region’s economy is oil and gas production and processing industry (minerals production generates over a third of GRP and more than half of industrial output), and its GRP dynamics depends on global prices on extracted minerals. The Region’s poorly diversified economy is vulnerable in the long term (production of minerals in aging fields gradually declines) and agriculture generating around 10% of GRP in various years is not capable of offsetting any possible stagnation in social and economic development in the Region (low degree of processing, limited margins and low fiscal effect). Per capita GRP, standing at around 85% of the national average (2013-2016 data), tends to decline gradually. Per capita income is below 75% of the national average.

High self-sufficiency of the budget owing to low diversification of tax revenues and high mandatory spending. The share of own revenues¹ of the Region’s budget equals 83% of the revenues excluding subventions of 2014-2017.  Stable revenues from corporate income and property taxes combined account for around 60% of own revenues and are largely driven by the largest taxpayers that operate in the dominant sector of the economy, i.e. the extractive industry. According to ACRA estimates, the share of tax revenues from all Region’s companies of that sector reached 40%-47% in 2013-2016, with two largest taxpayers accounting for around 30%. High level of mandatory spending undermines the operating balance that generates less than 21% of regular revenues of the Region, and limits Region’s capacity in making capital expenditures at its own costs. Capital expenditures averaged 15% of the total expenses in 2014–2017, and they would decline to 9%-11% in 2018 due to insufficient relevant financing from the federal budget.

¹ Own revenues = tax and non-tax revenues.

Relatively low debt load and soft debt repayment schedule minimize refinancing risks. The Region’s debt comprises long-term bonds and fiscal loans (the respective restructuring agreements have been signed by the Region’s government); that is why the operating balance less interest expense to debt repayment amount ratio (excluding intra-year utilization of credit lines and loans granted by the Federal Treasury Department) equaled 2.51 (moderate risk level). The debt to operating balance ratio of the Region was below 2x in 2014-2017, which corresponds to medium risk. The Region’s debt servicing expenses were unburdensome, in ACRA’s opinion, ranging from 9% to 11% of the operating balance in the above period. The Agency projects that debt load indicators would be stable (not decline) in 2018-2020. 

High liquidity. The Region has sufficient liquidity to timely perform its expense obligations including interest payments. In addition, free cash on budget accounts as at month-start is consistently below current months expenses, and therefore the Region requires financing of projected cash gaps from time to time. The Region’s administration uses short-term loans from the Federal Treasury Department and funds of autonomous and budget-funded entities for liquidity management as well as revolving credit lines, if needed.  The turnover of raised and repaid debt intra-year is below the total debt amount. As the Orenburg Region raises loans from the Federal Treasury Department, the Region has had no deposits since 2016.

Key assumptions

• The amount of transfers in 2019-2020 will remain at the level seen in 2015-2017;
• The Region generates tax revenues in 2019-2020 of at least the current planned amount;
• The conservative fiscal policy is maintained.

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 own revenues accompanied by lower share of mandatory spending and higher capital expenditures;
• Growth of economic development indicators (on per capita basis).

A negative rating action may be prompted by:

• Higher mandatory spending of the Region’s budget without pro rata increase of the budget’s revenue side;
• A decline of tax revenues in 2018-2020 by more than 3% of the planned level. 

Issue ratings

Credit rating rationale. In ACRA’s opinion, the below bonds issued by the Orenburg Region are senior unsecured debt instruments, and their credit rating is equal to the rating assigned to the Orenburg Region.

Key issue properties

1)     RegS / ISIN: RU35001AOR0 / RU000A0JTZK1

2)     RegS / ISIN: RU35002AOR0 / RU000A0JUPE3

3)     RegS / ISIN: RU35003AOR0 / RU000A0JVM81

4)     RegS / ISIN: RU35004AOR0 / RU000A0ZYKH5

Rating history

None.

Regulatory disclosure

The credit ratings have been assigned to the Orenburg Region and to bonds issued by the Orenburg Region (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) 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 course of assigning credit ratings to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

ACRA assigns credit ratings to the Orenburg Region and to issues of government securities of the Orenburg Region (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) for the first time.

The credit rating of the Orenburg Region and its outlook as well as the credit ratings of government securities issues of the Orenburg Region (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) are expected to be revised within 182 days after the rating action date (January 29, 2018) in compliance with the 2018 calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by the Orenburg 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 rating is solicited, and the Orenburg Region Government participated in its assignment.

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

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