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TEXT-Fitch revises Russia's Ivanovo Region outlook to negative

(The following statement was released by the rating agency)

Oct 11 - Fitch Ratings has revised Russia's Ivanovo Region's Outlook to Negative from Stable. Fitch has also affirmed the region's Long-term foreign and local currency rating at 'BB-', its Short-term foreign currency rating at 'B' and National Long-term rating at 'A+(rus)'.

The Outlook revision reflects the agency concern over the region's weak operating performance, poor debt coverage and the local economy's small size with wealth indicators well below average. The ratings also take into account the still moderate, albeit growing, direct debt, and moderate refinancing risk as a result of improving debt management and sound liquidity.

Fitch notes that the region's inability to cover its debt servicing needs from its own sources (operating balance and cash reserves) and/or a significant increase in short-term direct debt leading to high refinancing pressure would lead to a downgrade.

Fitch forecasts the region's budgetary performance will remain weak in 2012 with a negative operating balance equal to 0.5% of operating revenue. This is due to operating expenditure pressure driven by promises made during the elections of 2011-2012 which were not compensated by tax revenue and current transfers from the federal budget growth. Additional responsibilities on medical care also fuelled an increase in expenditure. Operating balance will gradually improve in 2013-2014 but remain weak.

Weak self-financing capacity for capital outlays makes Ivanovo highly dependent on federal capital grants for capex financing. Capital revenue, comprised of capital transfers from the federal budget, covered about 75% of capex in 2011. Current transfers also play an important role and accounted for 47% of operating revenue in 2011. However, the transfers stabilise the region's budgetary performance and smooth out the effects of negative economic cycles.

Ivanovo has weak debt coverage due to its negative operating balance, so the region relies significantly on external financing for capital expenditure. The region recorded a high rate of debt increase in the past two years albeit from a low level and the debt burden remains moderate. Fitch forecasts direct risk to increase to about RUB7.5bn or 29% of current revenue in 2012 and gradually increase to 35%-40% of current revenue in 2013-2014.

The region improved its debt management in 2012 and began to rely on medium term borrowing instead of short-term one-year bank loans as in 2011. Fitch estimates the refinancing needs of the region as low in 2012 and 2013. The region has already made all repayments for 2012 and refinancing needs in 2013 are about 15% of expected full-year direct risk. The peak of refinancing falls in 2014 when the region needs to repay about RUB3.6bn.

The region accumulated a significant RUB2.35bn cash balance at 1 January 2012. Fitch expects that this accumulated cash will cover up to 60% of its budget deficit in 2012, which will limit any direct risk increase.

The Ivanovo Region is located in the central part of European Russia. Its capital, the City of Ivanovo, is 275km north-east of Moscow. The region's socio-economic profile is weaker than the average Russian region. With a population of 1.1 million (0.7% of the national population) it contributed 0.3% of Russia's gross regional product.

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(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net))

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