OREANDA-NEWS. February 09, 2015. Fitch Ratings has revised Russian Kostroma Region's Outlook to Negative from Stable. It has also affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+' and Short-term foreign currency IDR at 'B'. Fitch also downgraded the region's National Long-term rating to 'A-(rus)' from 'A(rus)'. The Outlook on the National rating is Negative.

Kostroma region's outstanding senior unsecured domestic bonds have been affirmed at 'B+' and downgraded to 'A-(rus)' from 'A(rus)'.

KEY RATING DRIVERS
The ratings reflect Kostroma's material direct risk, with considerable refinancing needs concentrated in 2015. The Negative Outlook reflects increasing refinancing pressure in view of liquidity risk, accompanied by a potential increase of interest payments. A weakening socio-economic environment is also putting a strain on the region's financials.

The Outlook revision reflects the following rating drivers and their relative weights:

High
Fitch expects the region's direct risk to continue rising and to reach 100% of current revenue by end-2017. Direct risk rose in 2014 to RUB15.9bn or 86% of current revenue at end-2014 (2013: RUB11.7bn and 67%). This was to fund a widening deficit of 17.6% of total revenue (2013: deficit of 10.5%). We expect the region's deficit to narrow by 2016, but to still represent 6%-8% of total revenue.

A large part of Kostroma's debt is short-term, with 43% of total direct risk maturing in 2015 and a further 50% of outstanding debt due in 2016-2017. Fitch expects the region's current balance for 2014-2016 to be in negative territory, leading to more capital market funding. Fitch believes the region will be able to attain the required funding in advance of the existing debt maturity dates, but with interest rates in 2015 expected to be at least double their 2014 levels, refinancing and raising new debt will be significantly more expensive.

Refinancing risk is partly mitigated by the region's reliance on federal budget loans, which accounted for 42% of direct risk at end-2014. We believe maturing federal budget loans are likely to be rolled over and that the federal government will likely provide additional grants to regional budgets in 2015.

The region's 2014 budgetary performance deteriorated below Fitch's expectations. The operating balance declined to 0.2% of operating revenue in 2014, from a sound 7.5% in 2013. This was caused by continued pressure on opex and lower-than-expected tax collection amid a tough economic environment.

We expect operating performance in 2015-2017 will remain weak, with an operating balance at 2% of operating revenue and a negative current balance due to increasing interest expenses.

Medium
Kostroma's tax base has historically been modest, limiting its self-financing capacity. Fitch forecasts 4% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity, which would lead to a deterioration of its self-financing capacity.
However, weakening self-financing capacity is likely to be mitigated by higher federal transfers, which we expect to be 32% of operating revenue in 2015-2017. Such transfers, which averaged 30% of the region's operating revenue in 2013 and 2014, helped improve the region's budgetary performance during this period.

RATING SENSITIVITIES

The region's inability to curb growth of total indebtedness, accompanied by persistent refinancing pressure and a negative current balance, would lead to a downgrade.