Actions follow weakening of sovereign creditworthiness
London, 24 February 2015 -- Moody's Investors Service has today downgraded the ratings of 15 regional
and local governments (RLGs) in Russia, namely 11 Russian regions
and 4 cities, and 3 government-related issuers (GRIs) reflecting
the potential deterioration of their credit profiles in an environment
of increased systemic risk. Concurrently, Moody's has confirmed
the ratings of 3 Russian regions and 1 city. All ratings -
with the exception of those of the Republic of Tatarstan - have
negative outlooks.
This concludes the review for downgrade of these ratings that was initiated
on 20 January 2015. The rating of the Republic of Tatarstan remains
on review for downgrade as per the review initiated on 22 December 2014
(for details please see https://www.moodys.com/research/--PR_315548).
These rating actions follow the weakening of Russia's credit profile as
captured by Moody's downgrade of Russia's government bond
rating to Ba1 (negative outlook) from Baa3 (review for downgrade) on 20
February 2015. For additional information, please refer to
the related announcement: https://www.moodys.com/research/--PR_318857.
Specifically, Moody's has downgraded by one notch the ratings of
the City of Moscow, City of St. Petersburg, SUE Vodokanal
of St. Petersburg and OOO Vodokanal Finance, OJSC "Western
High-Speed Diameter", Republic of Bashkortostan, Republic
of Tatarstan, Autonomous-Okrug (region) of Khanty-Mansiysk,
Samara Oblast, Republic of Komi, Krasnodar Krai, Krasnoyarsk
Krai, Belgorod Oblast, Oblast of Nizhniy Novgorod, Republic
of Mordovia, Vologda Oblast, City of Krasnodar and City of
Volgograd.
Moody's confirmed the ratings of Moscow Oblast, Chuvashia
Republic, Oblast of Omsk and City of Omsk.
The full list of affected issuers and credit ratings can be found at the
end of this press release.
RATINGS RATIONALE
-- RATIONALE FOR DOWNGRADES ON RATINGS OF THE CITY OF MOSCOW,
CITY OF ST. PETERSBURG, SUE VODOKANAL OF ST. PETERSBURG,
VODOKANAL FINANCE AND WESTERN HIGH-SPEED DIAMETER
The downgrades of the ratings on the cities of Moscow and St. Petersburg
reflect their strong institutional links with the federal government and
their lack of special status, which prevents them from being rated
above the sovereign. In addition, both cities are exposed
to market risks and ongoing deterioration in the operating environment.
The downgrades of the issuer ratings of SUE Vodokanal of St. Petersburg,
the senior unsecured rating of OOO Vodokanal Finance, and senior
unsecured rating of OJSC Western High-Speed Diameter reflect their
status as government-related issuers that are fully owned by the
St. Petersburg government.
The downgrade of OJSC Western High-Speed Diameter's bond rating
reflects its link with the City of St. Petersburg and the guarantee
that the Russian government provides on its bond principal payments.
This guarantee covers overall principal payments (including put options)
and principal acceleration.
--RATIONALE FOR DOWNGRADE OF ANOTHER 13 RLG's RATINGS
The downgrade reflects Moody's assessment of the increase in systemic
risks following the weakening of Russia's credit profile, as captured
in the downgrade of the sovereign bond rating. Moody's expects
Russia's economy to contract in 2015-16 due to the combined
effect of the ongoing crisis in Ukraine and the collapse in oil prices
and the exchange rate on Russia, which will likely affect its economic
strength as well as the functioning of its financial markets. As
a result, Russian regions will face increasing pressure on their
financial fundamentals while higher borrowing costs could potentially
heighten refinancing and liquidity risks.
Moody's downgrade of the ratings of the Republic of Bashkortostan,
the Republic of Tatarstan, and the Autonomous-Okrug Khanty-Mansiysk
reflects their exposure to these increased systemic pressures, which
weaken their intrinsic strength. Given their current credit profile,
it is Moody's opinion that they cannot be rated at the same level
as the sovereign, or the cities of Moscow and St. Petersburg.
The regions' intrinsic strength is weaker than that of the cities
due to either: i) more concentrated economies; ii) less flexible
expenses; iii) lower liquidity or/and iv) higher debt burden.
The downgrade of the ratings of another 10 RLGs (Samara Oblast,
Republic of Komi, Krasnodar Krai, Krasnoyarsk Krai,
Belgorod Oblast, Oblast of Nizhniy Novgorod, Vologda Oblast,
Republic of Mordovia, City of Krasnodar and City of Volgograd) takes
into account weaknesses in their financial profile, which challenge
their ability to cope with a deterioration in the macroeconomic environment.
These RLG's are vulnerable to a deterioration in the operating environment
through one or a combination of the following factors: (1) moderate
or low operating balances, translating into moderate or weak financial
flexibility; (2) significant volatility of budgetary performance;
(3) refinancing risk and/or a high or rapidly growing debt burden in many
cases; (4) modest liquidity; and 5) vulnerability of local economies
to domestic cycles, which implies earnings volatility.
--RATIONALE FOR CONFIRMATION OF 4 RLGs' RATINGS
Moody's confirmation of the ratings of 4 RLGs (Moscow Oblast, Chuvashia
Republic, Oblast of Omsk, City of Omsk,) reflects these
entities' capacity to maintain credit profiles in their rating categories
despite growing systemic pressures. Systemic pressures can be partially
mitigated by some or a combination of the following factors: (1)
moderate level of market debt; (2) consistently adequate budgetary
performance; (3) relative stability of revenue streams due to strong
local economies or/and peculiarities of revenue structure (e.g.
for cities); (4) moderate to low refinancing risks.
-- RATIONALE FOR ASSIGNING NEGATIVE OUTLOOKS
The negative outlooks on the ratings of the cities of Moscow and St.
Petersburg reflect the cities' institutional and macroeconomic linkages
with the federal government which more than offset their strong individual
characteristics in an environment of the sovereign's weakened credit
quality. As a result, the negative outlooks mirror the negative
outlook on the sovereign government bond rating.
The negative outlooks on the ratings of SUE Vodokanal of St. Petersburg
and OOO Vodokanal Finance reflect their strong institutional, financial
and operational linkages with the city of St. Petersburg.
The negative outlook on the rating of OJSC Western High-Speed Diameter
mirrors the negative outlook on the City of St. Petersburg and
the sovereign government bond rating.
The negative outlook on the ratings of another 16 RLGs (Republic of Bashkortostan,
Autonomous-Okrug Khanty-Mansiysk, Samara Oblast,
Komi Republic, Oblast of Nizhniy Novgorod, Republic of Mordovia,
Krasnoyarsk Krai, Chuvashia Republic, Krasnodar Krai,
Moscow Oblast, Belgorod Oblast, Oblast of Omsk, Vologda
Oblast, City of Krasnodar, City of Omsk and City of Volgograd)
reflects the potential for the further deterioration of these issuers'
credit profiles in an environment of increased systemic risk. In
addition, the potential for a further weakening of the sovereign's
creditworthiness, as reflected in the negative outlook on the government
bond rating, could affect the federal government's willingness
and ability to provide on-going and extraordinary support to regional
and local governments.
--FOCUS OF THE REVIEW FOR DOWNGRADE FOR REPUBLIC OF TATARSTAN
Moody's is continuing its review for downgrade on the Republic of Tatarstan's
rating, which was initiated on 22 December 2014 (please see https://www.moodys.com/research/--PR_315548)
following increased uncertainty surrounding the ability of the Tatarstan
government to address the covenant breach of SINEK's $250 million
bond, for which it has provided a guarantee. Moody's understands
that some progress has been made by the Republic as it provided a letter
of notice to the issuer stating its intention to increase the guarantee
on the bond and received an approval from the State Council. At
the same time, the review continues to focus on further implementation
of Tatarstan's and SINEK management's action plan to increase the guarantee.
Any future sharp FX rate dynamics will also be taken into consideration
during the review.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the negative outlooks, an upgrade of the RLG's and GRI's ratings
is unlikely. If systemic pressures abate, the negative outlook
will likely be changed to stable, provided there is no deterioration
in the RLGs' budget performances. Further deterioration in the
sovereign's credit quality accompanied by the deterioration in their credit
profiles could exert downward pressure on these sub-sovereigns.
-- RATINGS AFFECTED
-- THE RATINGS OF THE FOLLOWING 18 ISSUERS WERE DOWNGRADED
Moscow, City of: the issuer ratings and backed senior unsecured
rating downgraded to Ba1 from Baa3, outlook negative.
St. Petersburg, City of: the issuer ratings and senior
unsecured rating downgraded to Ba1 from Baa3 outlook negative.
SUE Vodokanal of St. Petersburg: the issuer ratings downgraded
to Ba2 from Ba1, outlook negative.
OOO Vodokanal Finance: the backed senior unsecured rating downgraded
to Ba2 from Ba1, outlook negative.
OJSC Western High-Speed Diameter: the backed senior unsecured
rating downgraded to Ba3 from Ba2, outlook negative.
Bashkortostan, Republic of: issuer rating downgraded to Ba2
from Ba1, outlook negative.
Tatarstan, Republic of: issuer rating downgraded to Ba2 from
Ba1, review for downgrade.
Khanty-Mansiysk AO: issuer rating downgraded to Ba2 from
Ba1, outlook negative.
Samara, Oblast of: issuer rating downgraded to Ba3 from Ba2,
outlook negative.
Komi, Republic of: issuer rating downgraded to B1 from Ba3,
outlook negative.
Krasnodar, Krai of: issuer rating and senior unsecured rating
downgraded to B1 from Ba3, outlook negative.
Krasnoyarsk, Krai of: issuer rating downgraded to B1 from
Ba3, outlook negative.
Belgorod, Oblast of: issuer rating and senior unsecured rating
downgraded to B1 from Ba3, outlook negative.
Nizhniy Novgorod, Oblast of: issuer rating downgraded to B1
from Ba3, outlook negative.
Krasnodar, City of: issuer rating downgraded to B1 from Ba3,
outlook negative.
Mordovia, Republic of: issuer rating and senior unsecured
rating downgraded to B2 from B1, outlook negative.
Vologda, Oblast of: issuer rating downgraded to B2 from B1,
outlook negative.
Volgograd, City of: issuer rating downgraded to B2 from B1,
outlook negative.
-- THE RATINGS OF THE FOLLOWING 4 ISSUERS WERE CONFIRMED
Moscow, Oblast of: issuer rating of Ba2 confirmed, outlook
negative.
Chuvashia, Republic of: issuer rating and senior unsecured
rating of Ba3 confirmed, outlook negative.
Omsk, Oblast of: issuer rating of Ba3 confirmed, outlook
negative.
Omsk, City of: issuer rating of B1 confirmed, outlook
negative.
The sovereign action required the publication of this credit rating action
on a date that deviates from the previously scheduled release date in
the sovereign release calendar, published on www.moodys.com.
Specific economic indicators as required by EU regulation are not applicable
for these entities.
On 19 February 2015, a rating committee was called to discuss the
ratings of the Russian sub-sovereign entities. The main
points raised during the discussion were: The systemic risk in which
the issuers operate has materially increased.
The principal methodology used in rating Russia RLGs was Regional and
Local Governments published in January 2013. The principal methodology
used in rating Russia GRIs was Government-Related Issuers published
in October 2014. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vladlen Kuznetsov
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
David M Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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Moody's downgrades ratings of 11 Russian regions, 4 cities and 3 Russian government-related entities
