OREANDA-NEWS. Fitch Ratings has affirmed the Russian Orenburg Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term ratings are Stable.

Fitch has also affirmed Orenburg Region's and JSC Orenburg Housing Mortgage Corporation's (OHMC) senior debt, guaranteed by the region, at 'BB' and 'AA-(rus)'.

The affirmation reflects Orenburg region's satisfactory operating performance and moderate direct risk that are commensurate with its ratings.

KEY RATING DRIVERS
The 'BB' rating reflects the region's moderate debt with limited exposure to refinancing risk and satisfactory fiscal performance. The ratings also factor in the concentrated nature of the region's tax base to oil and gas companies, which is exacerbated by the current negative economic trend in Russia.

Fitch expects Orenburg Region to maintain direct risk at a moderate 40%-45% of current revenue in 2016-2018, after stabilising it at 40% in 2014-2015. The region's direct risk is composed of 56% domestic bonds and 44% subsidised loans contracted from the federal government. In line with our projections the region's payback period - as measured by direct debt/current balance - stabilised at 2.5 years in 2014-2015, after having hit a negative 16 years in 2013.

The region's exposure to immediate refinancing risk is limited as the average maturity of Orenburg's debt portfolio is manageable at four years and eight months. The region would need to refinance RUB2.6bn in 2016, or about 10% of its outstanding direct risk. The region's contingent risk is low. The region guaranteed OHMC's domestic bond of RUB1.5bn issued in 2012 and issued two other guarantees. None of the guarantees have been called by the lenders while the financial position of the public sector entities is deemed by Fitch as satisfactory.

Fitch projects the region will maintain satisfactory fiscal performance over the medium term, with an operating margin of about 10% and a small deficit before debt variation at below 5% of total revenue. Orenburg Region recorded a deficit before debt variation of 5.2% of total revenue at end-2015 (2014: deficit 3.8%), driven by funding needs for capex.

In line with our last year's projections Orenburg Region's fiscal performance stabilised in 2014-2015 with an operating surplus of 10% of operating revenue, compared with a small deficit of 0.2% in 2013. Taxes dipped to 76% of the region's operating revenue (2012-2014: average 80%) but Orenburg also successfully reduced its opex growth to 5%-6% in 2014-2015 (2013: 8%).

Orenburg had partially depleted its cash, which decreased to RUB391m at end-2015 from RUB1.9bn in 2014. The region had standby credit lines of up to RUB3bn at end-February 2016, which supports its interim liquidity.

In its medium-term forecast the region's administration projects modest economic growth of 1.2%-1.9% per annum in 2016-2018. Orenburg Region's economy is dominated by oil and gas companies, which provide a sustainable tax base. However, the concentrated tax base exposes the region to potential changes in the fiscal regime, business cycles or price fluctuations in the sector.

RATING SENSITIVITIES
The ratings could be positively affected by a sustained debt payback ratio of below four years and direct risk remaining below 40% of current revenue.

The ratings could be negatively affected by consistently weaker budgetary performance leading to weak debt coverage (direct debt/current balance) of the region.