OREANDA-NEWS. March 16, 2015. Fitch Ratings has affirmed the Russian City of Krasnoyarsk'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 city's National Long-term rating at 'AA-(rus)' with a Stable Outlook.

KEY RATING DRIVERS
The ratings reflect the city's moderate direct risk and developed local economy, although it is exposed to the current negative national economic trend. The ratings also factor in Fitch's expectation of Krasnoyarsk's ability to demonstrate stable budgetary performance and control direct risk at below 50% of current revenue in the medium term.

Fitch expects Krasnoyarsk to record a stable operating balance in line with the 2014 level and remain fully sufficient for its interest payment needs in 2015-2017. The city recorded 6.6% operating margin in 2014. However, the operating balance was not fully restored and Fitch does not expect it will return to its sound level of 2010-2012 (average 9%).

Krasnoyarsk possesses strong and diversified tax base and operating revenue to the large extent relies on taxes, which accounted for 45% of operating revenue in 2014. Personal income tax (PIT) - the major revenue source - is less dependent on the volatile business cycle and financial results of major taxpayers. However, Fitch expects the city could face a slowdown of tax proceeds in 2015 due to the negative national macroeconomic environment.

The city receives a significant, albeit declining amount of current transfers from the economically strong Krasnoyarsk region (BB+/Stable). In 2014, these accounted for 45% of the city's operating revenue down from 53% in 2012. Fitch expects the proportion of current transfers to decline to 34% of current revenue due to reallocation of some opex linked to social support of population to the regional budget. Following this reallocation, the region will cut the respective earmarked transfers to the city's budget.

Krasnoyarsk's debt burden is moderate and accounted for RUB8.7bn (35.7% of current revenue) by end-2014 up from RUB7.6bn a year earlier. Fitch expects the city's direct risk to reach RUB9.4bn by end-2015 and further increase to RUB11bn by end-2017. The direct risk relative to current revenue will notably increase in 2015 by almost 11 pp to 46% of current revenue. Approximately half of this increase is due to the absolute debt increase due to budget deficit. Another reason for the relative debt increase is the current revenue reduction caused by a cut in the current transfers.

The city's administration intends to limit the budget deficit so that its debt burden will remain below 50% of current revenue in 2016-2017. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.

Krasnoyarsk has to repay RUB3.3bn of a bank loan and RUB0.6bn of budget loan in 2015, which is equivalent to 43% of total direct risk as of 1 February 2015. This risk is mitigated by unused outstanding RUB3.6bn credit line as of 26 February 2015, which fully offsets bank loans coming due in 2015. Krasnoyarsk has reduced immediate refinancing risk by lengthening its debt profile in 2014. The city has contracted several credit lines including RUB4.2bn due in 2019 and RUB4.5bn due in 2017, which provided the city with more flexibility in terms of draw-down and repayment schedule, now spread over three to five years. Fitch expects the city to cover expected budget deficit by new bank loans. However, the cost of borrowing is likely to increase due to the depressed national debt capital market. Interest rates in 2015 could double their 2014 level, making raising new debt more expensive.

With a population of above one million, the city is the capital of Krasnoyarsk Region, one of the top 10 Russian regions by gross regional product. It has a strong industrial sector, which provides a strong tax base but exposes the city to volatile business cycles. Krasnoyarsk receives an insignificant amount of financial aid in the form of general-purpose grants from the region as its budget capacity exceeds that of other municipalities in the region.

RATING SENSITIVITIES
Maintenance of direct risk below 50% of current revenue, coupled with recovery of sound budgetary performance with sustainable operating margin at about 15%, would lead to an upgrade.

Deterioration of budgetary performance with an operating margin permanently below 5%, coupled with increasing refinancing pressure stemming from short-term bank loans, would lead to a downgrade.