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Moody's takes rating actions on Russian sub-sovereigns.

Summary: Specific economic indicators as required by EU regulation are not applicable for these entities.

Moody's Investors Service has today placed the

following ratings on review for downgrade:

(i) the B1 foreign and local-currency issuer and senior unsecured

ratings of the city of Moscow; (ii) the B1 foreign and local-currency

issuer and senior unsecured ratings of the city of St. Petersburg; (iii)

the B2 issuer rating of SUE Vodokanal of St. Petersburg; (iv) the B2

senior unsecured rating of OOO Vodokanal Finance; and (v) the B3 senior

unsecured rating of OJSC "Western High-Speed Diameter". These rating

actions follow Moody's placement of Russia's B1 government bond rating

on review for downgrade on 28 March 2014. For additional information,

please refer to the related announcement:

https://www.moodys.com/research/Moodys-places-Russias-B1-government-bond-

rating-on-review-for--PR_294200.

Concurrently, Moody's has also affirmed the ratings and maintained the

outlooks on 15 other Russian regional and local governments (RLGs).

At the same time, Moody's has (1) downgraded Belgorod Oblast's issuer and

senior unsecured ratings to Ba2 from Ba1, retaining the negative outlook

on the ratings; (2) affirmed, but changed the outlook on Krasnodar Krai's

Ba1 issuer and senior unsecured ratings to negative from stable. In the

case of Belgorod and Krasnodar, the deterioration of their idiosyncratic

features has driven the actions.

A full list of affected issuers and credit ratings can be found at the

end of this press release.

RATINGS RATIONALE

--RATIONALE FOR REVIEW FOR DOWNGRADE: MOSCOW, ST. PETERSBURG, SUE

VODOKANAL, OOO VODOKANAL FINANCE, OJSC "WESTERN HIGH-SPEED DIAMETER"

The deterioration in Russia's credit profile has direct implications for

the ratings of Moscow and St. Petersburg given their institutional and

macroeconomic linkages with the national government. As Moody's believes

neither city is sufficiently insulated from national market risks and

does not have adequate fiscal autonomy to hold rating exceeding the

sovereign level, the review for downgrade has triggered a similar review

of both cities' issuer and senior unsecured ratings.

The review for downgrade on the B2 issuer rating of SUE Vodokanal of

St. Petersburg, B2 senior unsecured rating of OOO Vodokanal Finance,

and B3 senior unsecured rating of OJSC "Western High-Speed Diameter"

reflects their status as government-related issuers (GRIs), wholly owned

by the St. Petersburg government.

The review for downgrade on OJSC WHSD's bond rating reflects the link

with the city of St. Petersburg and the quality of the guarantee provided

by the Russian government on its bond principal payments. This guarantee

covers overall principal payments (including put options) and principal

acceleration.

--FOCUS OF THE REVIEW

The review will focus on growing systemic risks, as reflected in the

sovereign bond rating. The conclusion of the review will likely follow

the conclusion of the review at the sovereign level.

--RATIONALE FOR AFFIRMATION

Moody's affirmation of the ratings of Moscow Oblast, Bashkortostan,

Tatarstan, Khanty-Mansiysk AO; Samara Oblast; Chuvashia Republic, Komi

Republic, Krasnoyarsk Krai, Nizhniy Novgorod Oblast, Omsk Oblast, Vologda

Oblast, Mordovia Republic, Krasnodar City, Omsk City and Volgograd City

reflects the still sufficient capacity of these sub-sovereigns to

withstand systemic pressures and to maintain standalone creditworthiness

appropriate for their rating categories. The ratings assigned to these

sub-sovereigns are already detached from the sovereign by two to seven

notches, which confers a certain buffer of tolerance in case of a mild

deterioration of the sovereign's creditworthiness.

Moody's notes that these regions demonstrate adequate capacity to manage

short-term refinancing risks, both thanks to the national government's

liquidity access mechanism for RLGs, which helps to offset immediate

liquidity pressures, and ongoing lending from state-owned banks. Their

debt structure, which is absent of foreign-currency risk, and growing

maturities of their local-currency borrowing also help to mitigate

refinancing risks. Finally, the abovementioned Russian sub-sovereigns

have better resilience to global energy price volatility compared with

the Russian government, given their more limited budget dependence on

volatile taxes from the oil and gas sector.

--RATIONALE FOR DOWNGRADE: BELGOROD OBLAST

Moody's decision to downgrade Belgorod Oblast's issuer and debt ratings

to Ba2 from Ba1 reflects the region's rapidly deteriorating financial

metrics and its failure to deliver on its budget consolidation plan for

2013. The region recorded a -12.6% financing deficit in 2013, while it

debt grew to 71.9% of operating revenue from 57.4% in 2012. Moody's

notes that this has been driven by the substantial progressive decline

in the oblast's corporate income tax proceeds, which followed the recent

departure of a large regional corporate taxpayer (due to changes in the

national corporate income tax regime), and the pressure weak steel and

iron ore prices put on the financials of other key regional taxpayers

from the industry.

The negative outlook on the ratings reflects Moody's expectation of

further growth in Belgorod's debt burden, following its consistently high

financing deficit and below-potential tax revenue.

--RATIONALE FOR NEGATIVE OUTLOOK: KRASNODAR KRAI

Moody's decision to change the outlook to negative from stable reflects

Krasnodar Krai's increasing direct debt and its growing operating

expenditure, which may add to debt pressures in the medium term.

Krasnodar Krai has substantially increased its direct debt over past few

years (76.9% of operating revenue in 2013 from 46.4% in 2012), largely

in preparation for the Winter Olympic Games in Sochi in February 2014.

This debt pressure is partially mitigated by high share of federal

low-interest bearing loans (42% of the regional debt), which are

considered as a part of the sovereign pre-Olympic funding and are largely

due in 2023-32.

The negative outlook reflects Moody's expectation that the regional

government will increase its market borrowings in 2014-15 driven by (i)

the need to increase mandatory salaries in education and healthcare; and

(ii) likely growth in maintenance costs for new post-Olympic facilities.

WHAT COULD CHANGE THE RATINGS UP/DOWN

--RATINGS UNDER REVIEW

Should the sovereign credit quality deteriorate further, these

sub-sovereign ratings will appropriately follow a sovereign rating

action. In turn, if systemic pressures abate, review on these

sub-sovereign ratings will likely lead to their maintaining at current

levels.

--AFFIRMED RATINGS

For all affirmed ratings, downward pressure may arise from the rapid

deterioration in their financial metrics, leading to increasing

idiosyncratic risks. Further material growth in systemic risk, as

reflected in a weakening sovereign credit profile, may also adversely

impact these sub-sovereign ratings.

In turn, upward pressure will be determined by improving individual

financial profiles of the abovementioned sub-sovereigns, such as

significant debt reduction and/or structurally balanced budgets and

improving liquidity position.

--BELGOROD OBLAST

Should Belgorod Oblast fail to contain its financing deficit, which will

lead to further growth in its net direct and indirect debt ratio towards

80% of operating revenue, Moody's would consider downgrading the rating.

Should the region prove capable of decreasing its debt exposure and

containing financing deficits at low single-digit levels, Moody's would

consider stabilising the rating outlook.

--KRASNODAR KRAI

Should Krasnodar Krai's market debt grow to 55% of operating revenue,

which is largely appropriate for Ba2-rated regions, we will consider

rating downgrade.

At the same time, should the region prove capable of containing its

public debt at the current levels relative to its operating revenues,

this may be considered as a factor supportive of stabilizing the rating

outlook.

RATINGS AFFECTED

Moscow, City of: issuer and debt ratings of B1 placed on review for

downgrade.

Petersburg, City of: issuer and debt ratings of B1 placed on review for

downgrade.

SUE Vodokanal of St. Petersburg: issuer rating of B2 placed on review

for downgrade.

OOO Vodokanal Finance: debt rating of B2 placed on review for downgrade.

OJSC Western High-Speed Diameter: debt rating of B3 placed on review

for downgrade.

Belgorod, Oblast of: issuer and debt ratings downgraded to Ba2, with

negative outlook, from Ba1.

Krasnodar, Krai of: issuer and debt ratings of Ba1 affirmed, outlook

changed to negative from stable.

Bashkortostan, Republic of: issuer rating of B3 affirmed, outlook

stable.

Tatarstan, Republic of: issuer rating of B3 affirmed, outlook stable.

Khanty-Mansiysk AO: issuer rating of B3 affirmed, outlook stable.

Samara, Oblast of: issuer rating of Ba1 affirmed, outlook stable.

Chuvashia, Republic of: issuer and debt ratings of Ba2 affirmed, outlook

stable.

Komi, Republic of: issuer and debt ratings of Ba2 affirmed, outlook

stable.

Krasnoyarsk, Krai of: issuer rating of Ba2 affirmed, outlook stable.

Moscow, Oblast of: issuer rating of Ba2 affirmed, outlook stable.

Nizhniy Novgorod, Oblast: issuer rating of Ba2 affirmed, outlook stable.

Omsk, Oblast of: issuer rating of Ba2 affirmed, outlook stable.

Vologda, Oblast of: issuer rating of Ba3 affirmed, outlook negative.

Mordovia, Republic of: issuer and debt ratings of B1 affirmed, outlook

stable.

Krasnodar, City of: issuer rating of Ba2 affirmed, outlook stable.

Omsk, City of: issuer rating of Ba3 affirmed, outlook stable.

Volgograd, City of: issuer rating of Ba3 affirmed, outlook stable.

The sovereign action required the publication of this credit rating action

on a date that deviates from the previously scheduled release date in

the sovereign release calendar, published on www.moodys.com.

Specific economic indicators as required by EU regulation are not applicable for these entities.

On 27 March 2014, a rating committee was called to discuss the ratings of

Russian sub-sovereign entities. The main points raised during the

discussion were: The systemic risk in which the issuers operate has

materially increased.

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Publication:EMBIN (Emerging Markets Business Information News)
Geographic Code:4EXRU
Date:Apr 3, 2014
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