The 'B++' rating indicates that the Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) qualifies as a guarantee institution with a satisfactory degree of reliability. The risk of a delay in meeting obligations is moderate, the full or partial debt restructuring risk is insignificant. The rating assignment was based on the Credit Rating Methodology for Guarantee Institutions rev. February 25, 2016.

The credit rating is essentially supported by the Fund's conservative approach to sharing credit risks with its partners, lower payment obligations the Fund had to discharge, profitability of operations, and robust guarantee coverage.

Since entering the market, the Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) has provided 242 sureties for a total amount of RUB 536.3 million, which enabled small and medium-sized businesses to borrow RUB 1,705.4 million in loans. This indicates a moderately conservative guarantee policy: 31.4% of the borrowings were secured by the Fund's obligations as of January 1, 2017, which reduces potential risks associated with the high amount of payments the Fund may be forced to effect on demand of credit institutions.

In the period from January 1, 2016 to January 1, 2017, the amount of payments under surety agreements decreased by RUB 5.3 million (-74%). Last year, the guarantee institution discharged 1 payment obligation in the amount of RUB 1.9 million, its loss ratio being 2.64%. Despite the fulfillment of obligations under surety contracts, the balance of income and expenditure related to the Fund's guarantee activities was positive on January 1, 2017 (RUB 79 thousand). This can be considered as a positive rating driver for the guarantee institution.

In view of AK&M Rating Agency experts, the robust guarantee coverage for the sureties provided by the Fund's contributes to its rating. As of January 1, 2017, the Fund had deposits amounting to RUB 121 million with four credit institutions ranking among the top 5 credit institutions in terms of net assets and equity and having credit ratings equal to or exceeding 'A++' on the AK&M scale. The average interest rate on the deposits is 9.1% p.a.

It should however be noted that the Fund's capitalization decreased by 19% on account of flaws in the Fund's investment policy in 2015-2016. Assets of the Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) in the amount of RUB 27.7 million were invested in banks which later forfeited their licenses.

Other rating constraints include a contraction in the current surety portfolio, a low guarantee capital multiple and a low recovery ratio.

Since the start of 2016, the current surety portfolio decreased by RUB 34 million to RUB 99.2 million as of January 1, 2017, the lowest level in the period under review. The guarantee capital multiple also decreased this year (-23 p.p.). As a result, the surety portfolio to guarantee capital ratio was 67% at the start of 2017 (the average percentage in the market being around 100%).

We note almost complete absence of payments to the Fund as a result of resource procedures: since the start of operation, the Fund recovered RUB 71.7 thousand through applicable recourse procedures, while aggregate payments under surety agreements reached RUB 14,253 thousand. Therefore, the recovery ratio was a mere 0.5% on January 1, 2017.

Another rating constraint is a high percentage of clients engaged in the retail trade sector (59%, against the average percentage of about 20% in Kirov region). At the same time, about 40% of the borrowers under the effective surety contracts are sole proprietors for whom retail trade is the most typical activity profile. As a whole, these figures are somewhat different from the breakdown of small and medium-sized businesses borrowing in the region. The correlation between the amount of sureties provided by the Fund and the amount of loans provided in the region across industries was 53%.

The Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) was established on August 5, 2002 by Kirov region (represented by the Ministry of development of entrepreneurship, trade and external relations of Kirov region), PJSC Norvik Bank and the Federal Small Business Support Fund. The first surety was provided on July 29, 2010.

AK&M Rating Agency has assigned a guarantee institution rating to the Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) for the first time. All rating action announcements are available on the akmrating.ru website.

The rating is valid until April 2018. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the guarantee institution's rating are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the guarantee institution. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

This press release is based on the Statement of assignment of a guarantee institution rating to the Kirov Regional Fund for Support of Small and Medium-sized Businesses (microfinance institution) and the Credit Rating Methodology for Guarantee Institutions rev. February 25, 2016.

The rating, along with any information and conclusions provided in this report, only conveys our opinion and shall not be construed as a recommendation to lend money resources to the Fund or to seek its guarantees and sureties.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

AK&M Rating Agency

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www.akmrating.ru

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