Press Releases / 01.11.2016

Press Release as of 01.11.2016

Fund of Guarantees and Business Development of Pskov Region (FGBD PR)

AK&M Rating Agency has affirmed the national scale guarantee institution rating of the autonomous nonprofit organization ‘Fund of Guarantees and Business Development of Pskov Region’ at 'B++' sub-level 2. The outlook is stable.

The 'B++' rating indicates that the autonomous nonprofit organization ‘Fund of Guarantees and Business Development of Pskov Region’ qualifies as a guarantee institution with a satisfactory degree of reliability. The risk of a delay in meeting obligations is moderately low.

The rating of FGBD PR is supported by the growth of the surety portfolio and the amount of loans provided under partner programs, restoration of operating profitability, moderately low subsidiary liability, and ongoing financial stability.

After a relatively unsuccessful year 2015, the guarantee institution spurred providing sureties to small and medium-sized businesses in the region. In January-September 2016, the Fund provided 20 sureties against 13 sureties for the 9-month period in 2015, their total amount growing more than twice year-on-year to RUB 78.9 million. As a result, as of October 1, 2016, the amount of effective sureties topped the RUB 100 million mark for the first time in 4 years increasing by 37.4% for 9 months. The portfolio of loans provided against the Fund’s sureties grew by 12.8% for the same period. This, given an overall decline (-7.6%) in lending to small businesses in Pskov region, makes a strong positive contribution to the development of support to small and medium-sized businesses in the region.

Despite losses related to the discharge of duties under surety agreements, the guarantee institution earned a profit of approximately RUB 2.5 million for the 12-month period ending on September 30, 2016. While being unable to compensate for the previous year’s losses (RUB 8.43 million), this result set a positive trend which – if persistent – could strengthen the Fund’s rating position.

The considerable portfolio expansion and a minor reduction in the number of effective sureties (from 51 to 47 for the 9-month period in 2016) partially caused an increase in the Fund’s subsidiary liability in relation to the borrowers’ loan obligations. However, on October 1, 2016, the level of subsidiary liability was relatively low (42.4%, against a maximum regulatory threshold of 70%). The favorable subsidiary liability level reduces credit risks across the portfolio, which moderately supports the guarantee institution's rating.

We appreciate the guarantee institution’s ability to maintain financial viability and to increase its capitalization from RUB 150.3 million to RUB 152.3 million, despite the losses it incurred (ca. RUB 4 million since our previous review). This can be regarded a s key positive rating driver for FGBD PR.

The Fund’s rating is constrained by a high loss ratio, a low guarantee capital multiple, and an increase in the average amount of obligations.

Despite a reduction in payments in discharge of obligations in 2016 (3 payments this year against 12 in 2015), the Fund’s loss ratio remains above 6%. This is considerably higher than in the neighboring federal subjects of Russia (Leningrad, Tver, Smolensk regions) and above the average market percentage (4.9%) according to AK&M Rating Agency’s 2015 Ranking of Russian guarantee funds. The high loss ratio is one of the key rating constrains for the guarantee institution.

The guarantee capital multiple (the ratio of effective sureties to capitalization) increased owing to the surety portfolio expansion but stayed at a rather low level of 72.3% as of October 1, 2016. This, in our view, indicates low efficiency in using budgetary resources to provide credit support to small and medium-sized businesses in the region.

The above-mentioned surety portfolio expansion largely resulted from an increase in the average amount of surety (almost twice for the sureties provided in 2016), which increases potential losses in case of an individual borrower’s default, which is putting pressure on the guarantee institution's rating.

Besides, AK&M Rating Agency regards the extremely high percentage of overdue loans provided to small and medium-sized businesses in Pskov region as an external destabilizing factor. As of September 1, 2016, the loan arrearage was 29.4% (19.0% in the Northwest Federal District, 14.4% in Russia on average). The high overdue loan percentage poses additional risks of losses for the rated guarantee institution.

Autonomous nonprofit organization Fund of Guarantees and Business Development of Pskov Region (FGBD PR) affiliated to the government of Pskov region was established in 2009 with the aim of providing SME businesses with access to credit facilities and other financial resources.

As of September 30, 2016, the guarantee institution concluded about 250 surety agreements for a total amount of RUB 340 million. The loans provided against the Fund’s sureties amounted to RUB 877 million.

AK&M Rating Agency assigned a guarantee institution rating to FGBD PR for the first time on December 8, 2014. The last rating action in relation to the Fund was taken on December 16, 2015. All rating action announcements are available on the website.

The rating is valid until November 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 Customer. 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 credit rating to the autonomous organization ‘Fund of Guarantees and Business Development of Pskov Region’ and the Credit Rating Methodology for Guarantee Organizations rev. March 3, 2015.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the guarantee institution's efficiency in providing credit 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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Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.