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
Maintaining high-level budget self-sustainability amid continuing growth of mandatory expenses and decline in capital expenses. The share of own revenues of the Region’s budget equals 83% of the revenues excluding subventions in 2017. In 2018, own revenues will be at least 80%. The share of income tax in the structure of tax proceeds continued to decline, and it will amount to 40% as of end-2018 (vs 47% in 2017). At the same time, the share of property tax increased, and it will reach 20% as of end-2018 (vs 15% in 2014). Mandatory expenses persisted to grow and will reach 78% by the end of this year (vs 73% in 2014). As a result, the regional operating balance will remain the same as in 2017 (approximately 20-22%). Capital expenses are expected to decline to 12% in 2018 (averaged 14% in 2014-2017) due to insufficient relevant financing from the federal budget.
Relatively low debt load and soft debt repayment schedule minimize refinancing risks. 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 2.54 (moderate risk level) as of the end-2017. The above ratio expected for the end-2018 equals 4.9. Debt repayment planned for 2018-2019 will amount to RUB 4.9 bln (19% of total debt). In 2018, the Region’s debt servicing expenses will amount to 10% of the operating balance, and in 2019, they will be 13% at maximum. The Agency projects that debt load indicators would be stable (not decline) in 2018-2020.
Issue ratings
Orenburg Region Government Bond, 35001 (ISIN RU000A0JTZK1); maturity date — June 19, 2019, issue volume — RUB 5 bln — A(RU).
Orenburg Region Government Bond, 35002 (ISIN RU000A0JUPE3); maturity date — June 14, 2021, issue volume — RUB 6 bln — A(RU).
Orenburg Region Government Bond, 35003 (ISIN RU000A0JVM81); maturity date — July 3, 2025, issue volume — RUB 5 bln — A(RU).
Orenburg Region Government Bond, 35004 (ISIN RU000A0ZYKH5); maturity date — December 2, 2027, issue volume — RUB 4 bln — A(RU).
Credit rating rationale. In ACRA’s opinion, the 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.
Regulatory disclosure
The credit ratings of the Orenburg Region and bonds issued by the Orenburg Region (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) under the national scale for the Russian Federation were assigned and affirmed based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning a credit rating 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 was also used.
The credit rating of the Orenburg Region and the credit ratings of the government bonds (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region were first published by ACRA on January 31, 2018. The credit rating of the Orenburg Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JTZK1, RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region are expected to be revised within 182 days following the rating action date (July 26, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were 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 ratings are solicited, and the Government of the Orenburg Region participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by the Orenburg Region in its financial statements have been discovered.
ACRA provided no additional services to the Government of the Orenburg Region. No conflicts of interest were discovered in the course of credit rating process.
