Actions follow downgrade of Russia's government bond rating to Baa3
London, 20 January 2015 -- Moody's Investors Service has today downgraded the ratings of seventeen
Russian regions and cities and three government-related issuers
and placed them on review for further downgrade.
Concurrently, Moody's placed the ratings of Moscow Oblast and Mordovia
Republic on review for downgrade, reflecting potential deterioration
of their credit profiles in an environment of increased systemic risk.
These rating actions follow the weakening of Russia's credit profile as
captured by the downgrade of the sovereign government bond rating to Baa3
(review for downgrade) from Baa2 (negative) on 16 January 2015.
For additional information, please refer to the related announcement:
https://www.moodys.com/research/--PR_316487.
Specifically, Moody's has downgraded by one notch the ratings of
the cities of Moscow and 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, Chuvashia Republic, Krasnoyarsk Krai, Komi Republic,
Oblast of Omsk, Oblast of Nizhniy Novgorod, City of Krasnodar,
City of Omsk, City of Volgograd, Belgorod Oblast and Vologda
Oblast. The rating of Krasnodar Krai was downgraded by two notches.
These ratings are on review for further downgrade.
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 REVIEW FOR DOWNGRADE ON RATINGS OF THE
CITY OF MOSCOW, CITY OF ST. PETERSBURG, SUE VODOKANAL
OF ST. PETERSBURG, VODOKANAL FINANCE AND WESTERN HIGH-SPEED
DIAMETER
The review for downgrade on the ratings of the cities of Moscow and St.
Petersburg reflects the cities' institutional and macroeconomic linkages
with the federal government and mirrors the review for downgrade on the
sovereign bond rating.
The review for downgrade on the ratings of SUE Vodokanal of St.
Petersburg reflects its strong institutional, financial and operational
linkages with the city of St. Petersburg.
The review for downgrade on the rating of OJSC Western High-Speed
Diameter mirrors the review for downgrade on the City of St. Petersburg
and the sovereign government bond rating.
--RATIONALE FOR DOWNGRADE ON THE REMAINING 15 REGIONAL AND
LOCAL GOVERNMENTS' (RLGs') RATINGS
The downgrade reflects the increase in systemic risks following the weakening
of Russia's credit profile, as captured in the downgrade of
the government bond rating. The higher systemic risk is reflected
in the deteriorating operating environment in Russia as Moody's expects
Russian GDP to contract by 5.5% in 2015 and 3% in
2016. As a result, these 15 Russian RLGs will face increasing
pressure on their revenue base, as their corporate income tax proceeds
are expected to decline significantly in 2015, while personal income
tax will also likely reduce. In addition, higher borrowing
costs could potentially heighten refinancing and liquidity risks,
and negative pressure on federal government finances will likely limit
federal subsidies to RLGs.
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 increased systemic pressures. In addition,
these issuers have weaker intrinsic strength relative to the cities of
Moscow and St. Petersburg.
The downgrade of the ratings of another 12 RLGs (Samara Oblast,
Krasnodar Krai, Krasnoyarsk Krai, Komi Republic, Chuvashia
Republic, Oblast of Belgorod, Oblast of Omsk, Oblast
of Nizhniy Novgorod, Oblast of Vologda, City of Krasnodar,
City of Omsk, and City of Volgograd) takes into account the inherent
weaknesses in their financial performances, which undermine their
ability to cope with a deterioration in the macroeconomic environment.
Each of the 12 regions is vulnerable to this systemic deterioration through
one or a combination of the following factors: (1) moderate or low
operating balances, translating into moderate or weak flexibility
of financial performance; (2) refinancing risk and/or usually a high
or rapidly growing debt burden; (3) modest liquidity; and 4)
in many cases, vulnerability of local economies to domestic cycles,
which implies earnings volatility.
The downgrades of Krasnodar Krai and Oblast of Belgorod also reflect the
significant deterioration of their performances during the last several
years, which will make them increasingly vulnerable to the growing
systemic risk. Such weaknesses are reflected in the regions'
poor budgetary performances and high debt levels.
-- RATIONALE FOR REVIEW FOR DOWNGRADE ON THESE ENTITIES'
RATINGS
The decision to place these ratings on review for downgrade reflects the
growing systemic risks.
For the Republic of Tatarstan, Moody's also continues its
review 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 recently
provided a letter of notice to the issuer stating its intention to increase
the guarantee on the bond. 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.
-- RATIONALE FOR REVIEW FOR DOWNGRADE ON RATINGS OF MOSCOW
OBLAST AND MORDOVIA REPUBLIC
The decision to place these ratings on review for downgrade reflects the
potential deterioration of these issuers' credit profiles in an environment
of increased systemic risk (in the short term) which will likely outweigh
the relative strength of financial fundamentals of the Moscow Oblast and
exhaust the tolerance buffer against the sovereign downgrade of Russia
for Mordovia.
Both have been placed on review for downgrade, rather than downgraded,
as Moscow Oblast's rating includes (1) solid financial fundamentals;
and (2) a moderate probability of support from the Russian government,
while the rating positioning of the Mordovia Republic demonstrates significant
detachment from the sovereign.
--FOCUS OF THE REVIEW FOR DOWNGRADE FOR ALL 17 RLGs AND
3 GRIs
The review will focus on the impact of growing systemic risks and deteriorating
operating environment for Russian regions, as reflected by the downgrade
of the sovereign rating and its placement on review for further downgrade.
The conclusion of the review would likely follow the conclusion of the
review at the sovereign level.
The review for downgrade on Tatarstan's rating will also focus on
the successful implementation of Tatarstan's and SINEK management's action
plan to increase the guarantee.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the review for downgrade of the sovereign rating, an upgrade
of regions' ratings is unlikely. If systemic pressures abate,
the ratings are likely to be confirmed, provided there is no deterioration
in RLGs' budget performances. Further deterioration in the
sovereign's credit quality could exert downward pressure on Russian regions.
-- RATINGS AFFECTED
-- THE RATINGS OF THE FOLLOWING TWENTY ISSUERS WERE DOWNGRADED
AND PLACED ON REVIEW FOR FURTHER DOWNGRADE
Moscow, City of: the issuer ratings and backed senior unsecured
rating downgraded to Baa3 from Baa2 and placed on review for downgrade.
St. Petersburg, City of: the issuer ratings and senior
unsecured rating downgraded to Baa3 from Baa2 and placed on review for
downgrade.
SUE Vodokanal of St. Petersburg: the issuer ratings downgraded
to Ba1 from Baa3 and placed on review for downgrade.
OOO Vodokanal Finance: the backed senior unsecured rating downgraded
to Ba1 from Baa3 and placed on review for downgrade.
OJSC Western High-Speed Diameter: the backed senior unsecured
rating downgraded to Ba2 from Ba1 and placed on review for downgrade.
Bashkortostan, Republic of: issuer rating downgraded to Ba1
from Baa3 and placed on review for downgrade.
Tatarstan, Republic of: issuer rating downgraded to Ba1 from
Baa3 and remain on review for downgrade.
Khanty-Mansiysk AO: issuer rating downgraded to Ba1 from
Baa3 and placed on review for downgrade.
Samara, Oblast of: issuer rating downgraded to Ba2 from Ba1
and placed on review for downgrade.
Krasnodar, Krai of: issuer and debt ratings downgraded to
Ba3 from Ba1 and placed on review for downgrade.
Komi, Republic of: issuer rating downgraded to Ba3 from Ba2
and placed on review for downgrade.
Krasnoyarsk, Krai of: issuer rating downgraded to Ba3 from
Ba2 and placed on review for downgrade.
Chuvashia, Republic of: issuer and debt ratings downgraded
to Ba3 from Ba2 and placed on review for downgrade.
Omsk, Oblast of: issuer rating downgraded to Ba3 from Ba2
and placed on review for downgrade.
Nizhniy Novgorod, Oblast of: issuer rating downgraded to Ba3
from Ba2 and placed on review for downgrade.
Belgorod, Oblast of: issuer and debt ratings downgraded to
Ba3 from Ba2 and placed on review for downgrade.
Krasnodar, City of: issuer rating downgraded to Ba3 from Ba2
and placed on review for downgrade.
Vologda, Oblast of: issuer rating downgraded to B1 from Ba3
and placed on review for downgrade.
Omsk, City of: issuer rating downgraded to B1 from Ba3 and
placed on review for downgrade.
Volgograd, City of: issuer rating downgraded to B1 from Ba3
and placed on review for downgrade.
-- THE RATINGS OF THE FOLLOWING 2 ISSUERS WERE PLACED ON
REVIEW FOR DOWNGRADE
Moscow, Oblast of: issuer rating of Ba2 placed on review for
downgrade.
Mordovia, Republic of: issuer and debt ratings of B1 placed
on review for downgrade.
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 16 January 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 Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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Moody's downgrades ratings of seventeen Russian regions and cities and three Russian government-related entities
