The 'B++' rating indicates that the Association 'Business Support Center – MFI of Kursk region' qualifies as a guarantee institution (fund) with satisfactory reliability. The risk of a delay in meeting obligations is moderately low.

The key positive rating drivers for the guarantee institution include an expansion in the portfolio of loans provided against the fund's sureties; a guarantee capital increase; the Fund's low subsidiary liability on loans to small and medium-sized businesses; highly reliable guarantee coverage; an acceptable level of credit risk associated with the existing surety portfolio.

In 2015, the guarantee institution provided 47 sureties for a total amount of more than RUB 100 million, considerably exceeding the previous year's performance (7 sureties for a total amount of RUB 28.3 million). For the same period, the portfolio of loans secured by the Fund's sureties increased from RUB 116 million to RUB 286 million, i.e. almost 2.5 times. Despite this year's decline in key operating performance indicators, the loan portfolio increased by 9.1% as of July 1, 2016. Given a contraction in lending to small and medium-sized businesses in Russia (-6.1% for the 6-month period in 2016), we regard this result as quite satisfactory.

Since our previous review, the Fund's guarantee capital increased by more than 64% to RUB 139.7 million. We are pleased to note that the capital expansion is attributable not only to inflows from the federal and regional budgets, but also to the capitalization of some of the guarantee institution's net incomes (RUB 5 million).

The Fund's liability ratio (the amount of surety to loan amount ratio) is relatively low. In the current portfolio, the liability ratio is below 30%, the upper limit (determined by Business Support Center – MFI of Kursk region's surety provision policy) being 50%. To a certain extent, the low liability on loans to small and medium-sized businesses reduces risks of notable guarantee capital losses.

The fund's assets (guarantee capital) are deposited on accounts with top Russian banks: Sberbank of Russia, VTB Bank (PJSC), JSC Rosselkhozbank (RusAg), VTB 24 (PJSC). Given the high creditworthiness and stature of these financial institutions, even partial loss of the Fund's guarantee capital is nearly impossible.

The moderately low level credit risk primarily results from acceptable frequency of registered defaults of the Fund's principals and low concentration of the existing surety portfolio. AK&M Rating Agency's statistic simulation of possible losses arising from insolvency of the guarantee institution's clients shows that they would not exceed RUB 8.0-9.0 million with a confidential probability of 90%. This amount is commensurate with the Fund's cumulative net profit for the last 2.5 years and cannot therefore cause a heavy decline in its capitalization.

We regard weaker operating performance indicators, a lower guarantee capital multiple, moderately high lumpiness of the surety portfolio across industries and low coverage of the Fund's operating expenses by revenues as the key rating constraints for the Fund.

In the first half of 2016, the number of sureties provided by the Fund dropped more than three times to 8 from 28. As a result, the portfolio of current sureties declined for the first time since 2014 from RUB 97.8 million on January 1, 2016 to RUB 89.1 million on July 1, 2016. Accordingly, the Fund's fees decreased from RUB 1.1 million to RUB 0.2 million for the same periods. This, to a certain extent, erodes the guarantee institution's capability to further increase its capitalization and to absorb possible losses arising from off-balance sheet obligations.

As a result of the capitalization increase in 2015 and a reduction in the surety portfolio, the guarantee capital multiple decreased from 82.2% on October 1, 2015 to 63.8% on July 1, 2016, the average market level exceeding 100%, an evidence of the Fund's low efficiency in using budgetary resources to provide credit support to small and medium-sized businesses.

As of July 1, 2016, the share of loans secured by the Fund's sureties and provided to SME businesses operating in the wholesale and retail trade segment exceeded 50%. This concentration does not meet the regulatory authority's (the Ministry of Economic Development) recommendations and strongly contradicts the industrial breakdown of the regional loan portfolio where borrowers engaged in the wholesale and retail trade sector account for ca. 12% of the financial resources provided.

In the first half of 2016, the ratio of revenue (incomes in the form of fees for surety provision) to operating expenses was a mere 9.1% against 74.2% for the same period in 2015, indicating extremely low profitability of the guarantee institution's core activity, which puts pressure on its rating position.

The Association 'BSC – MFI of Kursk region' (previous name: nonprofit organization "Regional centre of supporting small and middle enterprises") was established on June 14, 2006. Over its existence (as of July 1, 2016), the guarantee institution concluded 90 surety agreements amounting to RUB 210.6 million. As of the last reporting date, the fund's capitalization was RUB 139.7 million. The guarantee fund actively cooperates with JSC Russian Small and Medium Business Corporation (RSMB Corporation). For the purpose of this cooperation, the Fund provided two syndicated sureties for a total amount of RUB 31.5 million in 2015.

In AK&M Rating Agency's 2015 Ranking of Russian guarantee institutions, the guarantee fund of Kursk region took the 42nd position among the 50 funds ranked (58th among 60 funds ranked in 2014). In December 2014, the activity of nonprofit organization RCSSME was internationally certified for compliance with the ISO 9001:2008 standard, including the compliance with the standards of providing sureties to SME businesses under loan contracts and other contracts.

This press release is based on the Statement of assignment of a guarantee institution rating to the Association 'BSC – MFI of Kursk region'. The rating assignment was based on the applicable Guarantee Institution Rating Methodology (AK&M Rating Agency, 2015).

AK&M Rating Agency assigned a credit rating to nonprofit organization RCSSME for the first time on June 30, 2014. The last rating action in respect of the Fund was taken on June 22, 2015. All rating action announcements are available on the www.akmrating.ru website.

The rating is valid until August 2017. 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 Rated Entity. 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.

The guarantee institution's rating, along with any information and conclusions provided in this press release, only conveys our opinion on the guarantee fund of Kursk region's ability to perform its obligations in relation to its sureties on time and in full, while maintaining sufficient financial stability to provide effective support to small and medium-sized businesses in the region..

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

Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.