The 'A' rating indicates that the Ulyanovsk Regional Surety Fund qualifies as a highly reliable guarantee institution. The risk of a failure to meet obligations in time is low.

The key positive rating drivers for the guarantee institution include steady capitalization growth, a favorable sectoral structure of the surety portfolio, a relatively low level of subsidiary liability, an acceptable loss ratio on a long-term horizon.

In the 12-month period ending on June 30, 2016, capitalization of the guarantee fund of Ulyanovsk region increased by more than 6% to RUB 305.7 million (form 19 certificate). Thus guarantee capital growth was driven by higher retained earnings and support provided to the Fund from budgets of various levels.

The breakdown of the Fund's surety portfolio by industries correlates almost perfectly to that of the consolidated loan portfolio of legal entities and sole proprietors in Ulyanovsk region and in Russia's Volga Federal District as a whole (the Pearson correlation coefficients being 98.6% and 96.4%, respectively). Besides, borrowers engaged in the wholesale and retail trade sector account for less than half of the total loan porftolio, which is not typical for regional guarantee funds. Therefore, the level of infrastructure risks attributed to the surety portfolio (portfolio-at-risk ratio) can be considered as insignificant.

The relation of the Fund's total effective sureties to the loan portfolio has not exceeded 40% throughout 2016 (the maximum acceptable percentage being 70%). The low level of liability mitigates credit risks on the portfolio as a whole, which contributes to the guarantee institution's rating.

As of July 1, 2016, the ratio of balanced loss (compensation payments minus recovery through recourse procedures) to the total amount of sureties provided was 3.9%, which is below the average market percentage in 2015 (4.9%, according to AK&M Rating Agency's ranking of guarantee institutions). We regard the Fund's claim settlement performance as satisfactory (approximately 12.5% of the total recourse amount is actually recovered).

In AK&M Rating Agency's view, the credit rating of the Ulyanovsk Regional Surety Fund is primarily constrained by weaker operating performance, a lower guarantee capital multiple, availability of factors likely to cause balance sheet and financial losses, moderately high concentration of liabilities within major customers.

The number of sureties provided by the Fund for loans to small and medium-sized businesses has decreased steadily in recent years (from 123 to 2013 to 58 in 2014 and 33 in 2015), with an ensuing 8% reduction in the amount of loans raised in the first half of 2016. This reduction is not disastrous, given a general contraction in lending to SME businesses in Russia by 5% for the same period, but the guarantee capital multiple (the relation of loans provided against sureties to the Fund's capitalization) has decreased from 4.12 to 3.09 over the period starting on January 1, 2015, an evidence of lower efficiency of using budgetary resources for providing guarantee support to small and medium-sized businesses in the region.

Our review of the Fund's financial profile and the structure of the current surety portfolio (including a statistical simulation of possible borrower default-triggered payments) has revealed a number of factors likely to cause certain balance sheet and financial losses (writing off of irrecoverable debts, payments under surety agreements in case the guarantee institution's principals default on their obligations). The maximum amount of such losses is estimated at ca. RUB 66.5 million exceeding 20% of the Fund's capitalization as of July 1, 2016. That said, potential losses do not exceed the Fund's retained earnings, which means that the Fund cannot lose its target capital (budgetary resources).

The moderately high concentration of the surety portfolio within major borrowers poses certain credit risks for the guarantee institution's activity. The Fund's five biggest principals (their total number reaching approximately 100) accounts for more than 20% of the current credit guarantees (in terms of off-balance sheet liabilities assumed).

Since 2009 when the Fund started providing sureties, it has concluded 507 surety agreements for a total amount of more than RUB 1.228 billion, which enabled small and medium-sized businesses to borrow RUB 2.76 billion in loans. As of the last reporting date, the surety portfolio of the guarantee institution amounted to RUB 305.7 million. In 2015, the Ulyanovsk Regional Surety Fund took the 24th position in AK&M Rating Agency's Ranking of Regional Guarantee Institutions comprising 50 guarantee institutions.

This press release is based on the Statement of assignment of a guarantee institution rating to the Ulyanovsk Regional Surety Fund. The rating assignment was based on the applicable Guarantee Institution Rating Methodology (AK&M Rating Agency, 2015).

AK&M Rating Agency assigned a rating to the Ulyanovsk Regional Surety Fund for the first time on October 13, 2015. All rating action announcements are available on the www.akmrating.ru website.

The rating is valid until September 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the guarantee institution's creditworthiness 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 Ulyanovsk Regional Surety Fund'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