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TEXT-Fitch affirms Ulyanovsk Region at 'BB-'; outlook stable

(The following statement was released by the rating agency)

Oct 05 - Fitch Ratings has affirmed Ulyanovsk Region's Long-term foreign and local currency ratings at 'BB-' and Short-term foreign currency rating at 'B'. The agency also affirmed the region's National Long-term rating at 'A+(rus)'. The Outlooks on the Long-term ratings are Stable.

The affirmations reflect Fitch's expectation of the region's budgetary performance stabilisation, low direct risk and contingent liabilities. However, they also factor in weak socio-economic profile of the region and modest self-financing capacity for capital outlays leading to debt growth.

An improvement in the operating balance to about 10% of operating revenue, coupled with moderate debt in line with Fitch's expectations would lead to an upgrade. Conversely, worsening budgetary performance coupled with a sharp growth of debt leading to significant deterioration of debt-coverage ratios would lead to downgrade.

Fitch forecasts the region will maintain a stable operating performance despite increasing operating expenditure pressure with operating margins at about 3%-4% in 2012-2014 supported by sound growth of tax revenue. Operating balance will remain satisfactory for debt servicing needs. The region's operating performance recovered in 2011, with operating balance increasing to 4% of operating revenue, up from weak balance of 1.8% in 2010. Operating revenue increased by 16.5%, while operating expenditure increased by 13.8% in 2011.

The agency forecasts the region will have high deficit before debt variation in 2012, at about 10% of total revenue. This will increase direct risk to a still low 22% of current revenue in 2012 (2011: 19%). The region has modest self-financing capacity for capital outlays and debt will continue to grow due to capital expenditure financed via new borrowing. However, Fitch forecasts the direct risk will not exceed moderate 30% of current revenue. Debt coverage ratio (direct risk/current balance) will be about six to eight years, above the direct risk average maturity of three years.

Fitch estimates the region's medium-term refinancing needs are moderate. The region has to refinance about RUB1bn budget loans in 4Q12 and RUB0.9bn of bank loans in 2013. This amount is completely covered by unused committed RUB2bn credit lines open with Sberbank ('BBB'/Stable/'F3'). The region has a refinancing peak in 2014, when it has to refinance about RUB3bn. The agency expects that the region will roll-over these loans with the bank.

The region's contingent risk is also low and solely composed of the debt of the region's public-sector entities. This totalled a modest RUB469m at year-end 2011 and is fully self-serviced by the companies.

Ulyanovsk, in the centre of European Russia, is part of the Privolzhskiy Federal District. The local economy is modest in size and per capita gross regional product contributed 0.5% of national GDP in 2010 and accounted for 0.9% of the country's population.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))