Fitch Affirms City of Tomsk at 'BB'; Outlook Stable
Fitch has also affirmed the city of Tomsk's outstanding senior unsecured domestic bonds' local currency long-term rating at 'BB' and National Long-term rating at 'AA-(rus)'.
The affirmation reflects Fitch's unchanged baseline scenario regarding Tomsk's good, albeit modestly deteriorating operating performance. It also reflects our expectation that the city will maintain debt at a moderate level in the medium term. The ratings also factor in low contingent liabilities and the well-diversified local economy, supporting low concentration of the city's tax base.
KEY RATING DRIVERS
Fitch expects the city's operating balance to reduce to about 10% of operating revenue in 2015-2017 from average 16.8% in 2012-2014 due to stagnating tax revenues amid economic downturn. In 1H15, personal income tax, the largest tax in the city's budget, demonstrated modest 4% growth, which was below the budgeted 6.6%. Fitch anticipates that cost control measures undertaken by the city's administration will offset the tax lagging and the city's fiscal performance will remain in line with 'BB' rating in the medium term.
Fitch forecasts Tomsk to record deficit before debt variation at about 7% of total revenue in 2015 after 0.2% surplus in 2014 as the city will realise capital projects postponed from the previous year. At end-2014, the city had high RUB632m cash reserves that were almost fully earmarked to capital expenditure financed by Tomsk region's budget. Fitch expects the city to reduce the deficit to about 3% in 2016-2017 driven by a capex decline towards 20% of total expenditure in 2016-2017 from a high 30% in 2012-2014 as the administration intends to limit debt growth.
Fitch expects direct risk to grow modestly to RUB3.5bn by end-2015 from RUB3.1bn at end-2014. In relative terms, the debt burden will remain moderate 30% of current revenue in 2015 and could reach 35% by end-2017 (2014: 29%). At end-June 2015, direct risk stabilised at RUB2.9bn and comprised 54% bank loans, 19% bonds issue and 27% budget loans. The majority of the budget loans comprised a RUB583m short-term treasury loan, a new debt instrument for the city. In 2015, Tomsk has utilised the treasury loan to cover intra-year cash gaps and to save on interest payments as the loan has a subsidised 0.1% interest rate. By end-2015, the treasury loan will be refinanced by market debt. Fitch expects that volatile interest rates in domestic markets may put pressure on the city's current margin in the medium term.
The city's refinancing needs are almost equally spread between 2015 and 2016. By end-2015, the city has to refinance RUB1.3bn maturing direct risk. The refinancing risk is mitigated by RUB890m contracted credit lines and RUB297m non-committed cash reserves accumulated by end-June 2015, which in total covered 90% of the refinancing needs for 2015. The majority of credit lines are revolving, which adds flexibility to the city's debt management. Another liquidity source is the registered RUB1bn bonds that Tomsk plans to issue to cover excessive funding needs if they arise.
Tomsk has a well-diversified service-oriented economy influenced by academic and research educational institutions. The tax concentration of the city's revenue is low, with the top 10 taxpayers representing less than 10% of the total tax revenue received by the city in 2014. Fitch forecasts a 3.5% contraction of national GDP in 2015, and believes the city will also face a slowdown of economic activity, albeit less than nationally.
RATING SENSITIVITIES
Restoration of sound budgetary performance with operating surplus at about 20% of operating revenue coupled with lengthening of the city's debt profile could be positive for the ratings.
Increasing direct risk above 50% of current revenue coupled with growing refinancing pressure, could lead to a downgrade.
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