CJSC AK&M Rating Agency assigned a 'B+' guarantee institution rating on the national scale to Autonomous Establishment of Republic of Kalmykia 'Center of enterprise development', with a stable outlook.
The 'B+' rating indicates that AE RK CED qualifies as a guarantee institution with a sufficiently strong financial position and an acceptable level of SME assistance in the republic. Full or partial default risk is low.
Autonomous establishment 'Center of enterprise development' was established by resolution no. 431 of the Republic of Kalmykia Government dated November 23, 2009. Its mission is to expand funding opportunities for small and medium-sized businesses through loans and other financial vehicles, to develop the system of lending to SME businesses and providing guarantees (sureties) for liabilities of small and medium-sized businesses. The founder of AE RK CED is the Ministry of economy and trade of the Republic of Kalmykia. AE RK CED has been providing sureties to SME businesses since late 2010.
The guarantee institution's rating is supported by its compliance with the requirements of item 5.11 of the Russian Ministry of Economic Development's Order 220 as of April 24, 2013 and the sustainability of its guarantee activities.
AE RK CED provides sureties to SME businesses registered in the Republic of Kalmykia under loan contracts exceeding RUB 1 million in value and maturing in no less than 1 year. Under the loan contract concluded, the borrower provides collateral covering at least 30% of the borrower's total liabilities. The liabilities of AE RK CED under the surety agreements concluded do not exceed 70% of the total amount of SME obligations in relative terms (actually 56% as of April 1, 2014). This scheme enables AE RK CED to minimize the risk of default on its payment obligations arising from the surety agreements. AE RK CED's limit of deposits with commercial organizations (banks) does not exceed 50% for any particular bank.
As of January 1, 2014, the guarantee institution received RUB 12.763 million in income (+72.8% above the 2012 level). The interest income from deposits is dominating the earnings profile of AE RK CED (90.4% of the total income). AE RK CED's expenses are mostly accounted for by salaries, rental payments, information support costs, etc. In 2013, AE RK CED's operating expenses totaled RUB 2.715 million increasing by a mere RUB 100 thousand against 2012. As a result, the guarantee institution is generating a positive cash flow which may be used for its core activity (provision of sureties to SME businesses).
The main negative rating drivers for the guarantee institution are the paucity of surety agreements concluded, the growing loss ratio and a high risk of financial stability problems resulting from the partial loss of assets.
In terms of the total amount of surety commitments, AE RK CED is one of the outsiders among the guarantee institutions (as follows from AK&M Rating Agency's H2 2013 Ranking of Guarantee Institutions). Over its existence, AE RK CED has provided only 44 sureties for a total amount of RUB 129.117 million, which ensured loans of RUB 230.753 million from the partner banks. In the first quarter of 2014, the guarantee institution did not provide a single surety, although the total amount of financing provided in 2013 (in absolute terms) increased by RUB 40.550 million, four times the amount of sureties provided in 2012.
In 2013, AE RK CED discharged its first ever obligation to a credit institution paying a total of RUB 4.329 million. As a result, the guarantee institution's loss ratio on April 1, 2014 was 3.35%, which is 1.15% above the regulatory limit of 2.2% set equal to the percentage of arrears on loans to non-financial entities in the Russian Federation, according to the Central Bank of Russia's data as of the last reporting date (clause 220.127.116.11.4 of the Russian Ministry of Economic Development's Order 220 dd. April 24, 2013). Also, the Commercial Court has ruled to grant the claim of OJSC Rosselkhozbank to recover RUB 5.380 million from the guarantee institution in payment under the guarantee provided to a legal entity adjudicated bankrupt over the death of its founder and chief executive.
As of April 1, 2014, AE RK CED had RUB 107.211 million on deposit accounts with two Russian banks (OJSC First Republican Bank and OJSC Nota-Bank). The deposits with credit institutions accounted for 50% of the guarantee institution's capitalization. Given the revocation of license from OJSC First Republican Bank on May 5, 2014, AE RK CED now faces a risk of losing some of its deposits in the amount of RUB 50 million. In a downside scenario involving the write-off of that amount, the guarantee institution will face the loss of its accumulated earnings and a decline in equity capital. While AE RK CED certainly meets the regulatory requirement regarding the limit of deposits per banking institution (50% for a guarantee capital equal to or below RUB 150 million), it could have sustained fewer losses with a greater diversification of investment media.
Autonomous Establishment of Republic of Kalmykia 'Center of enterprise development' was registered in November 2009. The sole founder of the guarantee institution is Ministry of economy and trade of the Republic of Kalmykia.
Over its existence, the guarantee institution has concluded 44 surety agreements amounting to over RUB 100 million, raising 2.3 rubles in SME-targeted external investments per each ruble of public investment. As of April 1, 2014, the guarantee institution's surety portfolio totaled RUB 96 million, the amount of funds raised reaching RUB 231 million. AE RK CED secured the 50th position (second position from the bottom) in AK&M Rating Agency's H2 2013 Ranking of Guarantee Institutions comprising 51 entities.
This press release is based on the Statement of assignment of a guarantee institution rating to Autonomous Establishment of Republic of Kalmykia 'Center of enterprise development'.
The rating assigned, along with any information and conclusions provided in this press release, only conveys our opinion on the entity's reliability and shall not be construed as a recommendation to provide loan facilities, to receive guarantees or surety bonds.
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.
CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.
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"AK&M", 09.06.2014 16:24