OREANDA-NEWS. Fitch Ratings has affirmed Russian Kaluga 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. Kaluga's outstanding senior unsecured domestic bonds (ISIN RU000A0JRHN7) have also been affirmed at 'BB' and 'AA-(rus)'.

The ratings reflect the administration's efficient and proactive management, the region's rapid economic development and sound budgetary performance. The ratings also factor in increasing pressure on operating expenditure and a growing debt burden, including contingent risk stemming from the liabilities of public sector entities (PSEs), although the maturity profile of these liabilities is long-term.

Fitch expects Kaluga to continue to demonstrate solid operating performance, supported by further expansion of its tax base. The agency expects full-year operating balance to be at 10%-12% of operating revenue in 2014-2016, in line with the 11% reported in 2013. This was down slightly from an average of 15.4% during 2010-2012, due to increasing operating expenditure pressure and decline in corporate income tax (CIT) proceeds in 2013. Operating spending will remain under pressure as a result of the national government's decision to increase public sector salaries and reduce transfers from the federal budget. However, the administration expects CIT to recover in 2014 on growing industrial output.

Fitch expects Kaluga's direct risk, including the liabilities of the Development Corporation of Kaluga Region (DCKR), to increase 16% to RUB28bn in 2014, fuelled by a forecast deficit before debt variation of RUB3.7bn. Over the medium term the region intends to narrow the budget deficit and limit debt growth. Fitch therefore forecast direct risk to stabilise in absolute terms during 2015-2016, while operating revenue growth should allow the overall debt burden to gradually decline to 60% by end-2016, from 70% in 2014.

Fitch expects debt coverage (direct debt to current balance) to be five to six years in 2014-2016, which is higher than the region's average direct debt maturity profile of three years. This would be similar to the 5.5 years reported in 2013 but down from a strong two years in 2012.

Kaluga is not exposed to high immediate refinancing risk as it has only RUB400m (about 2% of direct risk) due by year-end. However, the region will need to repay about 70% of its direct risk (RUB19.3bn) in 2015-2017, mostly bank loans. Fitch expects the region will substitute part of bank loans with the loans from the federation and roll over the remaining maturing liabilities with the same banks.

The regional government is focussed on local economic development and on expanding the tax base. Kaluga has been successful in attracting foreign investments, promoting industrial production and innovation. These policies have allowed the local economy to grow at a cumulative 25.9% in 2011-2013, well above the 9.3% average for the Russian Federation. The government forecasts economic growth of 7% p.a. in 2014-2015.

Kaluga actively uses PSEs to finance local investment projects. It established DCKR, which at end-2013 borrowed RUB6.8bn to finance the development of regional industrial zones. Two other regional public companies incurred a combined RUB1bn debt at end-2013 to finance various investment projects. The region provides subsidies to cover the principal and interest on the debt of these PSEs. Consequently, Fitch considers the liabilities of those PSEs as the region's direct risk. Positively, PSEs' liabilities have a long-term maturity profile till 2022.

RATING SENSITIVITIES
Maintenance of sound operating performance with operating margins of 12%-14%, and restoration of strong direct debt coverage in line with the region's average debt maturity, would lead to an upgrade.

Continued deficit before debt variation leading to direct risk increasing above 75% of current revenue and deterioration in direct debt coverage beyond 10 years would lead to a downgrade.