The credit rating on the Krasnodar Krai (hereinafter, the Region) is supported by zero risk of long-term debt refinancing and high budget liquidity. The rating is restricted by high debt load and limited flexibility of budget expenditures.
The Region is a part of the Southern Federal District. Almost 4% of Russia’s population live there, and around 3% of the aggregate GRP of Russian regions is generated in the Region. The Region is a consistent leader among Russian regions in terms of agricultural production. It is also a large Russian health resort and an important transportation cluster.
Key rating assessment factors
Debt repayment schedule is smooth, offsetting negative effects of high debt load. By the end of 2018, the Region's debt to operating balance is expected by ACRA to be about 3.4x, which is considered by the Agency as a significant level of risk. The projected budget deficit will be covered by account balances; the absolute debt may slightly decline. The Region needs no loans from the Federal Treasury Department (FTD), and the debt structure by instrument is expected to be stable throughout the year. Market debt, including bonds and bank loans with a comfortable repayment schedule, will be about 46% of the total debt at year-end. 40% of the debt will be budget loans, most of which are due after 2024. The remaining 14% is a guarantee issued by the Region for a public sector enterprise. The likelihood of annual payments under the guarantee is assessed by ACRA as high. High debt load is offset by a smooth repayment schedule, as in 2019–2020, the annual average refinancing volume will amount to 14% of the current debt. As a result, in the period from 2018 to 2020, the operating balance less interest expenses will be twice the amount of debt due in each year. The debt servicing costs are not burdensome (14% of the operating balance in 2018).
The high share of expenditures that cannot be cut down restricts budget indicators. The share of own budget revenues, excluding subventions, is high: in 2015–2018, it will be 86%. The share of the mandatory expenditures of the Region is high (77% in the above period), which is negative for the "budget discipline and control" rating factor. Over the past five years, the largest share of regional budget tax revenues has been provided by such sectors as “Trade and repair” and “Transport and communications” (in particular, pipeline transportation): 18% and 17% on average, respectively. Those sectors are also the largest contributors to the Region's GRP. In 2018, according to ACRA estimations, tax revenues will increase by no more than 3-4% against the high base of 2017, when they increased by 13%. The main growth driver will be the property tax increase. Capital expenditures of the Region are low (12% on average) in 2015–2018.
Diversified economy; economic indicators close to national averages. The major share of the Region's GRP is generated by such sectors like transport and communications (large pipelines run across the Region), trade and repairs, and agriculture (in terms of agricultural production, the Region is a leader among Russian regions), as well as manufacturing (including food industry and oil refining) and services. Tax proceeds by sector are uneven, which is caused by the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The per capita cash income and unemployment rate have been close to the national averages, while the per capita GRP has been consistently below the national average by 20%.
- In 2018, income tax revenues will remain at the same level as in 2017;
- In 2018, budget deficit will be covered by the Region's account balances, and the volume of debt will not change;
- Capital expenditures will remain at 10% or higher;
- In 2019–2020, the amount of transfers to the Region will remain at the level seen in 2015–2016;
- The Region will comply with the budget loan restructuring agreements.
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:
- A decrease in the relative debt burden;
- The situation when the Region's obligation to issue guarantees in favor of a public sector company ceases to exist;
- Increased flexibility of budget expenditures;
- A positive economic and tax effect from the growing share of manufacturers offering products with high added value.
A negative rating action may be prompted by:
- A decrease in own revenues of the Region by 5% or more from the levels forecasted by ACRA for 2018–2020;
- A lower self-sufficiency of the Region’s budget;
- Growing ratio of debt to operating balance of the Region;
- A decline in the share of capital expenditures in the Region's budget to a critical level.
Credit rating rationale. In ACRA’s opinion, the below bonds issued by the Krasnodar Krai are senior unsecured debt instruments, and their credit rating is equal to the rating assigned to the Krasnodar Krai.
Krasnodar Krai, 34005 (ISIN RU000A0JVZE0), maturity date: November 27, 2018, issue volume: RUB 4.8 bln — А(RU).
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10.0 bln — А(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4, registration number RU35002KND0), issue date: June 05, 2018, maturity date: June 03, 2025, issue volume: RUB 10.0 bln — А(RU).
The credit ratings were assigned to the Krasnodar Krai and to bonds issued by the Krasnodar Krai (ISIN RU000A0JXYS9, ISIN RU000A0JXYS9, ISIN RU000A0ZZ8X4) 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 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.
For the first time, the credit rating of the Krasnodar Krai and credit ratings of government securities of the Krasnodar Krai (ISIN RU000A0JXYS9, ISIN RU000A0JXYS9) were published by ACRA on October 18, 2017. The credit rating has been assigned to the Krasnodar Krai's bond (ISIN RU000A0ZZ8X4) for the first time.
The credit rating of the Krasnodar Krai and its outlook as well as the credit ratings of government securities issues of the Krasnodar Krai (ISIN RU000A0JVZE0, ISIN RU000A0JXYS9, ISIN RU000A0ZZ8X4) are expected to be revised within 182 days after the rating action date (October 15, 2018) in compliance with the Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned based on the 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 rating is solicited, and the Krasnodar Krai Administration participated in its assignment.
No material discrepancies between the data provided and the 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.