OREANDA-NEWS. Fitch Ratings has affirmed Russian Tula Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with Stable Outlook. The region's outstanding senior unsecured domestic bonds' (ISIN RU000A0JT1G2 and RU000A0JUAC9) ratings have also been affirmed at 'BB' and 'AA-(rus)'.

The ratings reflect Tula's satisfactory operating performance, moderate albeit increasing direct risk and a well-diversified economy. They also reflect weak debt coverage exceeding its debt maturity profile and the overall modest scale of its economy.

Fitch expects Tula's operating balance will be supported by further expansion of the region's tax base and will remain sufficient to cover interest expenses in 2014-2016. In 2013, the operating balance improved to 5.4% of operating revenue from 3% in 2012, due to increases in taxes and current transfers from the federal budget. Fitch assumes the budget deficit before debt variation will gradually decline over the medium term to 5%-6% of total revenue in 2015-2016 after peaking at almost 11% of total revenue in 2013 driven by high capex.

Fitch expects Tula's direct risk to remain moderate in 2014-2016 in the range of 35%-40% of current revenue (2013: 30%). The region's direct risk maturity profile, which stretches to 2017, was shorter than its debt payback ratio of 7.5 years in 2013. Fitch does not expect the debt payback to match the region's average maturity profile over the medium term, leaving it exposed to refinancing risk. However, the region is free of contingent liabilities, which is credit positive.

Refinancing needs in 2014 are limited to the repayment of a RUB2bn short-term budget loan, which could be covered by unutilised credit line the region has with a commercial bank. It is highly likely that the maturing budget loan will be refinanced, at least partially, by a new medium-term subsidised budget loan at 0.1% interest rate. If this is the case, the region will save on future interest payments.

The administration has decided not to issue new domestic bonds in 2014 amid the unfavourable economic and geopolitical situation, and will rely on bank loans with two to three year maturities for budget-deficit financing. Fitch expects that the contraction of medium-term debt obligations will gradually even out the region's maturity profile.

The region has a modest but growing economy. The regional economy is diversified and has a well-developed processing industry. Nevertheless, the region's economic profile is still modest, with GRP per capita at 82% of the national median. At the same time, Tula's economic growth of 5.1% outpaced national growth of 1.3% in 2013. The administration expects the regional economy will continue to outperform the national average in 2014.

The ratings are weighed down by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within government tiers.

RATING SENSITIVITIES
An improvement in the operating balance close to 10% of operating revenue for two consecutive years accompanied by debt payback being in line with debt maturity would lead to positive rating action.

Conversely, inability to maintain stable operating performance with an operating margin above 5% resulting in weak debt payback exceeding 10 years would lead to a downgrade.