The 'A' rating indicates that the State Business Support Fund of Kaluga region (MFI) qualifies as a highly reliable guarantee organization. The risk of a failure to meet obligations in time is low.

The key positive rating drivers for the guarantee institution include steady support to small and medium-sized businesses in the region, restoration of operating profitability, and a well-structured surety portfolio across industries.

As of September 30, 2016, the guarantee institution's surety portfolio was composed of 64 contracts for a total amount of RUB 234.7 million against 62 contracts for a total amount of RUB 218.6 million at the start of 2016. At the end of 2013 and 2014, the guarantee institution's surety portfolio amounted to RUB 250.0 million and RUB 252.8 million, respectively. Therefore, the support by the Fund of small and medium-sized businesses in the region in terms of providing credit guarantees remains relatively steady, which we regard as a positive factor, given an overall contraction in lending to SME businesses in Russia (-4.4% in the 9-month period of 2016), and in Kaluga region (-19.1% in January-September). In the same period, the amount of loans provided on the sureties of the State Business Support Fund of Kaluga region to its principals increased by more than 8%.

Despite the discharge of three payment obligations under surety contracts for a total amount of RUB 16.5 million in 2016, the balance of income and expenditure attributable to guarantee activities remained positive reaching RUB 3.2 million on September 30, 2016.

The breakdown of the Fund's surety portfolio by industries (running total) correlates almost perfectly to that of the consolidated loan portfolio of legal entities and sole proprietors in the region (in terms of economic activities which can be financed by loans on sureties of state guarantee funds). On September 30, 2016, the correlation ratio for the two portfolios reached almost 98%. The proportion of loans provided to businesses in the sector of wholesale and retail trade was a mere 23%, while SME businesses engaged in industrial sectors accounted for more than 40% of the financial resources provided by credit institutions. It can therefore be noted that the guarantee institution successfully supports small and medium-sized industrial companies in the region indirectly contributing to the implementation of local investment projects.

The guarantee fund's rating is also supported by its high capitalization of approximately RUB 540 million (which provides objective opportunities for a substantial expansion of the scope of guarantee support provided to small and medium-sized businesses in the region) and a moderately low level of the Fund's subsidiary liability for the borrowers' obligations (about 45%).

The key destabilizing force for the guarantee institution's rating is a higher loss ratio as the total amount of payment obligations the Fund had to discharge grew faster than the amount of support provided to its principals did. Since the start of 2014, the relative balanced loss ratio (adjusted for the amount recovered through applicable recourse procedures) increased from 0.6% to 8.8%, now approaching the average percentage of overdue debt on loans provided to SME businesses in the region (13.2% as of October 1, 2016) and almost twice above the consolidated balanced loss ratio of the regional guarantee institutions ranked by AK&M Rating Agency according to their 2015 performance (4.9%). The further loss ratio growth could raise the risks of partial loss of the Fund's guarantee capital.

The rating of the State Business Support Fund of Kaluga region is constrained by the lumpiness of the surety portfolio (5 largest principals account for more than 40% of the Fund's obligations) and a low guarantee capital multiple (43.3% as of October 1, 2016).

Besides, the relatively poor quality of assets is putting certain pressure on the guarantee institution's rating. As of September 30, 2016, debts qualifying as almost irrecoverable receivables (deposits with the bankrupt and delicensed Investbank, recourse claims related to the discharged payment obligations under surety contracts and overdue debt on microloans with payment delays exceeding one year) accounted for almost 20% of the Fund's assets. Besides, the fair value of financial assets only slightly exceeded the Fund's target capital.

The State Business Support Fund of Kaluga region (MFI) was established in 1995 by the Kaluga territorial department of the State Committee for Antimonopoly Policy of the Russian Federation with the aim of financing the development of small and medium-sized businesses, business competition and putting restrictions on monopolistic activities.

The Fund has been providing sureties since 2009. As of September 30, 2016, the guarantee institution concluded 171 surety agreements for a total amount of almost RUB 700 million, which enabled small and medium-sized businesses to borrow approximately RUB 1.5 billion in loans.

AK&M Rating Agency assigned a guarantee institution rating to the State Business Support Fund of Kaluga region (MFI) for the first time on January 27, 2014. The last rating action in relation to the Fund was taken on January 25, 2016. All rating action announcements are published on the akmrating.ru 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.

This press release is based on the Statement of assignment of a guarantee institution rating to the State Business Support Fund of Kaluga region (MFI) and the applicable Guarantee Institution Rating Methodology (2015).

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

Ul. Gubkina 3, Moscow, Russia

www.akmrating.ru

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