National Factoring Company

Transcription

1 Information Memorandum January 2007

2 Contents I. Introduction 3 II. Overview of the Borrower 1. History 4 2. Participants 4 3. Managing bodies and key managers 5 4. Market strategy and future plans 8 5. Operational review of the Borrower International borrowings Selected consolidated financial information Credit ratings 35 Appendix. Currency FX rates 36 2

3 National Factoring Company (Limited Liability Company) accepts responsibility for the information contained in this Information Memorandum. To the best of the knowledge of NFC (which has taken all reasonable care to ensure that such is the case), the information contained in this Information Memorandum is in accordance with the facts. I. Introduction National Factoring Company was established in June 2003 as a limited liability company. NFC s predominant business activity is factoring. The Company offers full-service factoring and is presently one of the leaders in the Russian factoring market. Our company's mission is to become the most dynamically developing factor in Europe and the most innovative in the world. We are striving to achieve a leading position in market share, business efficiency and service quality for the benefit of our shareholders, clients and staff. The Company has signed over factoring agreements with clients from 40 industry sectors and has worked with more than 30 thousand debtors. NFC representative office network includes 21 regional offices in Russia and the CIS. Total assets of the Company amounted to RUB 5,4 billion as of 30 Sept NFC is rated B- by Standard & Poor's. NFC is a member of the leading global factoring associations - International Factors Group and Factors Chain International. 3

4 II. Overview of the Borrower 1. History National Factoring Company (Limited Liability Company) (the Company, the Bank, the Borrower ) was established on 17 June 2003, as NIKoil IBG Bank factoring business was shaped into a separate company following the existing international standards of factoring business structuring. NIKoil IBG Bank started its factoring business in February 1999 providing a relatively new complex of financial services to the Russian trade market. Since their launch, the services became much in demand, increasing the factoring turnover of NIKoil IBG Bank at least twice each year. After four years of successful growth of the factoring business the shareholders approved acquisition of a small bank for factoring development purposes. The new bank was renamed to National Factoring Company URALSIB-NIKoil stressing that it would be designed solely for providing professional factoring and associated services. As the following step, in November 2005 the management team of the bank decided to rename it to National Factoring Company (Limited Liability Company). The new name and logo are aimed in particular at enhancing NFC s own business relationship with commercial banks in Russia and abroad. NFC is licensed by the Central Bank of the Russian Federation (License on banking operations 3437 issued 03 September 2003). Following the needs of its clients, NFC has been developing its representative office network which currently includes 19 regional offices in the main cities of Russia and two foreign operations offices in ex-soviet republics of Moldova and Armenia. NFC is a member of the two largest worldwide known associations of factoring companies - IFG (International Factors Group) with the headquarters in Brussels and FCI (Factors Chain International) based in Amsterdam. Mr Treyvish, the Chairman of NFC Management Board, is also the member of the Board of Directors of IFG and the President of IFG s East European Chapter, one of the units of IFG acting on behalf of the Group and introducing abilities and advantages of the association in the CIS and East European countries. NFC is the cofounder of the East European Factoring Association known for its contribution to market education on factoring and involvement of new professional players into the market. 2. Participants The participants of NFC are Limited Liability Company Salerna (50%) and Limited Liability Company CENTERRYBOPRODUCT (50%). 4

5 Table 1. Initial statutory fund and its increases: Date of Issue of Participatory Shares Number of Participatory Shares Par Value per Participatory Share, RUB Total fund raised, RUB Both participants are private companies which realize investment activity and operations with securities. The Bank is ultimately controlled by Mr Nickolai A. Tsvetkov President of URALSIB Financial Corporation. The decision to reorganize NFC from a limited liability company into a closed joint stock company was taken at the general meeting of participants in July The legal procedure is almost completed: in January 2007 the Company expects its CJSC banking license to be issued by the Central Bank of Russia, following which NFC will be officially referred to as a closed joint stock company. The shareholders in a joint stock company do not possess, by virtue of law, the right to freely offer their shares to the company for buy-back (with certain exceptions set out in the Federal Law No. 208-FZ On Joint-Stock Companies ), unlike participants in a limited liability company where a participant may opt to leave the company and demand return of the value of his participatory share. Also, compliance with capital adequacy requirements as per the Basle II Capital Accord will be achieved by NFC. The term for the creditors claims for early redemption by NFC of its liabilities expired in September The composition of the Company s creditors has not substantially changed as a result of the reorganization. All key NFC partners have continued collaboration with the Company. Frequency of participants meetings General meetings of participants of the Company are set up annually, and special general meetings of participants in case of necessity. 3. Managing bodies and key managers Board of Directors Currently there are 5 members of the Board of Directors: Denis Korobkov (39 years old) has been the Chairman of the Board of Directors since In Mr Korobkov was Vice-President of UHK METALLOINVEST. From 2001 till 2002 Mr Korobkov was in the position of Adviser at the Ministry for Economic Development and Trade 5

6 of the Russian Federation and in worked as the Manager of the Transport Industry Investment Department of NIKoil IBG Bank. Apart from being the Chairman of NFC s Board of Directors, since 2004 Mr Korobkov has simultaneously been in the following positions: Executive Director and Head of the Investment Department in BANK URALSIB, Deputy Director and Financial Director of Management Investment Company URALSIB LLC. Since 2005 Mr Korobkov has also been the member of the Board of Directors of OJSC «TD «KOPEYKA». Mr Korobkov graduated from the Moscow State University with bachelor degree in Economics and Social Planning. In 1992 has obtained Ph.D. in Economics. Natalya Artemyeva (57 years old) has been the member of the Board of Directors since In Ms Artemyeva was Deputy Chairman of the Commercial Bank AVTOBANK- NIKOIL. In Ms Artemyeva was Deputy Chairman and Chief Executive Director of NIKoil IBG Bank and the member of the Board of Directors of the same bank. Ms Artemyeva graduated from the Moscow Financial Institute with bachelor degree in Finance. Oleg Komarov (38 years old) has been the member of the Board of Directors since In Mr Komarov was the Manager of the Internal Audit Department of the Commercial Bank AVTOBANK-NIKOIL and in 2004 the Head of Internal Control Department of this bank. Since 2004 Mr Komarov has been appointed to the position of the Head of the Internal Control Department in BANK URALSIB. Mr Komarov graduated from the Finance Academy under the Government of the Russian Federation with bachelor degree in Accounting and Audit. Mikhail Treyvish (35 years old) has been the member of the Board of Directors and the Chairman of the Management Board since Since 1995 Mr Treyvish managed the Factoring Department of Rossiyskiy Kredit Bank, implementing the factoring concept of risk-management, building-up the factoring technology and adopting international experience for the operations in Russia. In 1999 Mr Treyvish became the Chief of the Factoring Department in NIKoil IBG Bank (the core bank of URALSIB (former NIKoil) Financial Corporation) and in 2001 the Head of Factoring and Electronic Business in NIKoil. In 2001 Mr Treyvish was appointed to the position of Deputy Chairman of NIKoil IBG Bank. Mr Treyvish graduated from Moscow Aviation Institute (MAI) with the qualification of Engineer- Mathematician and has obtained Ph.D. in Economics at the Russian Academy of Science. Tagir Usupov (28 years old) has been the member of the Board of Directors since In Mr Usupov was the officer in banking projects analysis of the Financial Control Department of BANK URALSIB (Ufa). In Mr Usupov was the senior officer in Financial Analysis and Informational Support of the Financial Department of the Uralo-Siberian Bank. In 2004 Mr Usupov fulfilled duties of the Manager of the Business Planning and Analysis Department of the Economics and Finance Division of the Uralo-Siberian Bank. Since 2004 Mr 6

7 Usupov has been appointed to the position of Manager of the Analysis Department in BANK URALSIB Economics and Finance Division. Mr Usupov graduated from Ufa State Aviation Technical University with bachelor degree in Economics. Authorities of the current Board of Directors will terminate April 30, Management board Mikhail Treyvish Chairman of the Board. For qualifications please see previous section. Roman Ogonkov (33 years old) took the position of Senior Deputy Chairman in NFC in In Mr Ogonkov was Deputy Chief of the Factoring Department of Rossiyskiy Kredit Bank working together with Mikhail Treyvish on factoring operations application in the bank, adaptation of international experience in factoring and client relationship development. In Mr Ogonkov was the Managing Director of the Operational Factoring Company URALSIB- NIKoil (LLC) created in NIKoil Financial Corporation to assist the regional development of NIKoil IBG Bank factoring business. Mr Ogonkov graduated from the Moscow State Institute of International Relations (MGIMO- University) with major in international economics. Ella Skaletskaya (33 years old) has been in the position of Deputy Chairman since In Ms Skaletskaya was the Chief Accountant in Commercial Bank Chastny Bank. Up to 2001 Ms Skaletskaya was the senior officer in the Accounting Department of NIKoil IBG Bank. Till 2004 Ms Skaletskaya was responsible for methodology and development of innovative products and management accounting in the Factoring Department of NIKoil IBG Bank. Ms Skaletskaya graduated from All-Russian Distance Institute of Finance and Economics with bachelor degree in Economics. Ms Skaletskaya also graduated from the University of the Russian Academy of Education as bachelor in Law. Stanislav Pushtorskiy (31 years old) took the position of Deputy Chairman in In Mr Pushtorskiy was the senior officer in Rossiyskiy Kredit Bank, being involved in sales and marketing of the bank s products. Up to 2002 Mr Pushtorskiy developed sales and marketing of factoring services in NIKoil IBG Bank. In Mr Pushtorskiy was responsible for international factoring business in NIKoil IBG Bank. Mr Pushtorskiy graduated from the Moscow University of Consumer Co-operatives with bachelor degree in Economics. Other key managers Anton Musatov (26 years old) Head of the Corporate Risk Management. 7

8 Since March 2002 till August 2003 Mr Musatov was the senior officer of the Risk Assessment and Losses Recovery in the Financial Risks Complex Insurance Department at ROSNO OJSC. In Mr Musatov was the councilor of the Senior Executive Director/Deputy Chairman of NIKoil IBG Bank and in March-September 2004 managed the Underwriting Department of NFC. In Mr Musatov was responsible for Operations, Credit Control Department, Risk Monitoring and Underwriting, and since 2005 has been the Head of the Corporate Risk Management, developing client approval and underwriting system, credit control and risk management policies. Mr Musatov graduated from the State University of Management in 2002 with bachelor degree in Economics. Vladimir Shukraliev (47 years old) has been the Head of the Receivables Management Department since July In Mr Shukraliev was the Vice-president of the International Collection & Credit Management Agency REGION-VOLGA, being responsible for credit management and collection services in Russia, operating requests coming from international collection agencies. Since March 2003 Mr Shukraliev has been managing NFC's regional office in Saratov and since 01 March 2005 has been the Head of NFC's Regional Division South (which includes several regional offices). Mr Shukraliev graduated from Saratov State University with bachelor degree in Psychology. 4. Market strategy and future plans Factoring market data presented in this chapter includes extracts from market research by RosBusinessConsulting and Expert RA. The Russian factoring market has shown dynamic development in the last 2 years. The industry s turnover almost doubled and rose to US$5,7 billion versus US$3 billion expected by analysts The volume of financing provided by factors under debt assignment composed 4,2 billion US dollars against 1,5 billion in The share of factoring transaction in total amount of GDP became 0,9 percent compared with 0,5 percent in The main driver of such rapid growth was ever-growing demand of domestic small- and mediumsized companies for financing, risk and debt management reflecting ongoing strong economic growth seen in Russia in last years. Meanwhile, widening of product line offered by Russian factors contributed to the shift in attitude towards significant rise in interest to this kind of financial services. 8

9 The continued strength in market development in the next 2-3 years could boost the industry to US $40 billion turnover in 2008 and align it with the factoring business in the West-European countries. At present, the market players can be split into 4 main categories: Commercial banks. Most of these banks are engaged in invoice discounting, and only few of them provide traditional factoring services. Companies with banking licenses specializing in factoring. NFC is the largest of these companies. Non-banking companies specializing in factoring. Partnerships of banks and factoring companies. In the framework of the partnerships, banks provide financing, and factoring companies manage risks and engage in other necessary activities. Structuring factoring business as a separate company enhances its opportunities in creating partnerships with financial institutions both in Russia and overseas. Such step also enables to improve a specialized risk management system that compares favorably to traditional commercial bank approach to decision making. According to the data of Bank of Russia, there were 84 banks rendering factoring services at the beginning of 2005 and this number increased to 100 at the of the year. Experts forecast further market growth, which is favored in particular by improving legal environment. Presently factoring accounts for approximately 1% of Russian GDP compared to about 12% in Great Britain and Italy that are traditional leaders in the world factoring market. This indicates a mid-term development potential for the Russian market. In spite of light decline in the market concentration, the factoring business still remains highlyconcentrated with the total share of five largest players equaled to 87 percent. Since its origination the main target of NFC factoring team was to become the market leader in professional factoring, developed in the scope and traditions of internationally accepted concept of factoring business. NFC factoring team obtained the share of around 80% of Russia s factoring market, which was on the level of 30% in 2005, despite tightening competition. 9

10 Table 2. Market share by Factors in 2005 (by amount of debt assigned to Factors), % NFC 30 Eurokommerz 21 Petrocommerce 15 Promsvyazbank 11 NOMOS-BANK 10 Others 13 Source: Expert RA According to Expert RA ranking of Russian factors for the 1 st half of 2006, NFC was ranked first by factoring income, second by volume of financing provided to clients in the framework of factoring and by number of clients. NFC is also one of the three biggest factoring companies of Eastern Europe. The Company s client base numbers hundreds of clients daily assigning to the Company receivables from goods sale and service rendering to dozens of thousands customers. The key targets for NFC by 2008 are stated as follows: (1) to achieve gross income of USD 95mln, income before tax of USD 43mln, and the number of clients of 1300, (2) to keep high return on assets on the background of mitigated risks, (3) to become the largest factoring company in Central and Eastern Europe, (4) to remain the leader and market maker of the Russian factoring market, (5) to develop a factoring concept and become the leader and market maker on the growing market of the CIS. In order to achieve the mentioned goals, the Company has planned the following steps: (1) Market placement of factoring as a unique non-banking product basket that is trade business driven with an increased value of services, either with or without financing, and including inter alia the following products: Factoring-Signal (warning of potential losses caused by customers frauds or insolvency), Factoring-Guarant (bad debt protection and repayment of guarantied amount after a grace period), Factoring-Finance (cash flow gaps mitigation via receivables finance) (2) Involvement of external refinancing of factoring operations in order to avoid dependence on a limited number of funding parties, decline funding expenses, enhance market strength and factoring sales power, book positive credit history and apply the brand name to the capital and investment markets. (3) Further development of the brand of NFC via PR-events. (4) Implication of agents for boosting sales, 10

11 (5) Launch of commercial projects in factoring together with banks and other financial institutions in combination with their agency activities and funding facilities, (6) Employee driven HR management aimed at supporting the winning spirit of the team capable to achieve the strategy goals (under 5-7% of average personnel fluctuation in the Company). One of the main purposes of NFC in the near future is to arrange for reasonably diverse and inexpensive sources of funding to achieve higher competitive power on the background of growing competition on the factoring market and accessibility of funds for potential clients. JSC VTB and NFC LLC have started a joint project Syndicated factoring, involving joint factoring customer service by VTB and NFC. VTB is engaged in pre-marketing and initial negotiations with potential factoring clients, running primary documentation and funding factoring transactions. NFC is responsible for the sales of commercial factoring products, customer consulting, claims registration, accounts receivable management and clients protection from credit risk. As a result of the project implementation, NFC expects income growth and geographic extension of its client base. 5. Operational review of the Borrower Scope of business As mentioned above, NFC s business activity is factoring and associated services in the open market. Daily operations include receiving shipping documents from clients, running assessment procedures, granting credit limits, releasing financing (Factoring-Finance) and/or sureties (Factoring-Guarant) against approved receivables, collection, dunning and other procedures (Factoring-Signal) connected with providing the full range of factoring services to NFC s clients. Registration of receivables is handled in all the Company s offices, financing is released from the Moscow office where all the financial services, Treasury, Accounting Department, Credit Committee and underwriters are based. All NFC clients enjoy the Bank s financing, receiving it on their settlement accounts with their servicing banks in Russia and overseas. NFC s target customers are trading and industrial companies selling goods and rendering services on credit terms and interested in refinancing their working capital, in protection against bad debts arising from trading receivables, assessment, collection and arbitration services connected with trading receivables. The core industries represented by NFC s clients are: computers and computer appliances, alcoholic beverages, foodstuffs, building finishes and accessories, household appliances, perfume and cosmetics etc. 11

12 Domestic factoring operates as follows. (1) A supplier (the Client ) sells goods to a buyer (the Debtor ) on deferred payment basis. The Client assigns receivables to NFC, under a pre-agreed factoring contract, due to the Client by its Debtor. Following the assignment, all the payments are made by the Debtor directly into NFC s account. (2) Upon execution of the assignment and submission of the underlying documents evidencing the shipment of goods, NFC provides to the Client factoring financing within the pre-agreed lending limits applicable to the Debtor (up to 90% of the receivables value). (3) At maturity, the Debtor makes payment of 100% of the receivables into NFC s account. (4) NFC utilizes the factoring financing amount to discharge the Client s payment obligations under the factoring contract and transfers the balance. NFC invoices the Client monthly for its remuneration (factoring commission, interest, etc.) The Client is to pay the invoice within 15 working days. (5) If Debtor A fails to pay its due under the contract, under Factoring Agreement NFC (i) is entitled to claim the Client for a recourse payment of the respective financing amount of the receivables from the Debtor A (after a certain waiting period) or (ii) may reduce the balances arising from payments of this Client s other Debtors for this respective amount (less the corresponding financing duly discharged) to be transferred to the Client. Such balances result from the fact that NFC finances only a certain share of a receivable as described in the clause 2 herein. Prior to the provision of factoring financing as described above, NFC and the Client execute a factoring contract and agree on (i) the initial list of the Client s Debtors eligible for factoring and (ii) lending limits in respect of each eligible Debtor. Upon execution of the factoring contract NFC s e-factoring system is updated with the confirmation of allocated lending limits and details of approved Debtors. The list of Debtors may change if applied by the Client and approved by NFC. 12

13 Receivables portfolio description Table 3. Structure of NFC s client portfolio by annual volumes of receivables assigned (receivables turnover)*. Sector 31 December 2004 Share, % Status Share, % 31 December 2005 Change, % Status Share, % 15 September 2006** Change, % Building/construction materials Food Alcohol and beverages Household appliances Computers/computer components Perfumes and cosmetics Other consumer goods Other goods Automotive: spare parts Metals/rolling Household chemical goods Petrochemicals * Hereinafter turnover refers to the aggregate of the face value of receivables assigned to NFC. ** Turnover by 15 September 2006 amounted to $1.102 bln. Status The above figures evidence that the share of the largest factoring portfolio sector in terms of turnover is gradually declining: 2004 alcohol and beverages (16.6%), 2005 computers/computer components (16.1%), 8.5 months 2006 building/construction materials (15.0%). The share of the top-3 sectors decreased from 46.9% in 2004 to 42.94% in 8.5 months Since factoring is mainly focused on consumer goods, the growth of the other consumer goods sector, which was consistent in the last two years and showed 250% growth in 8.5 months of 2006, indicates NFC s development in the new markets. The decline in the share of the other goods sector means ceasing operations on poor-factorable (non-typical) product markets. 13

14 Table 4. Number of clients 31 Dec Dec Sept 2006 Total number of clients Number of clients comprising 80% of financing outstanding As can be seen, both total number of clients and number of clients comprising 80% of financing outstanding slightly declined by mid-september 2006 compared to the end of However, a long-term growth trend is recognized. The share of the big clients in 8.5 months 2006 remains around the same as in 2005 (~14%). Table 5. Number of debtors 31 Dec Dec Sept 2006 Total number of debtors Number of debtors of the clients comprising 80% of financing outstanding Share of debtors of the clients comprising 80% of financing outstanding 29,82% 36,53% 36,61% Risk distribution among debtors is an important parameter in factoring portfolio risk analysis and should be investigated more seriously than clients repayment power. Thus, NFC s riskmanagement mechanism (please see Part II. Overview of the Borrower, Chapter 5. Operational review of the Borrower, section Risk management ) is predominantly focused on the assessment of receivables portfolio and each debtor in particular. Table 5 evidences that NFC s receivables portfolio is well balanced in terms of this parameter, indicating that a significant part of the debtors produce payment to clear 80% of financing outstanding, and this ratio is increasing. 14

15 Table 6. Concentration of financing outstanding per clients and debtors Average financing outstanding per client, RUB Average financing outstanding per debtor, RUB Average financing outstanding per client to total financing outstanding Average financing outstanding per debtor to total financing outstanding 31 Dec Dec Sept , , , , , ,96 0,34 0,17 0,13 0,050 0,024 0,022 Table 6 shows that the average financing outstanding both per client and debtor declines in terms of both values and ratios to total financing outstanding. This evidences a gradual improvement of the receivables portfolio in terms of credit risk: NFC becomes less dependant on possible clients and debtors defaults. Table 7. Top-10 clients by turnover Share of top-10 clients by turnover in total turnover 31 Dec Dec Sept Number of debtors of top-10 clients by turnover 31 Dec Dec Sept Top-1 client Top-2 client Top-3 client Top-4 client Top-5 client Top-6 client Top-7 client Top-8 client Top-9 client Top-10 client Total: Table 7 shows the top-10 clients of NFC selected by receivables turnover. As can be seen, the share of each client from the top list declines each year, indicating that NFC becomes less dependant on 15

16 big clients. In 2004 the top-1 had the share of 10,99%, while in mid-september 2006 this share was just 5.38%. The aggregate share of the top-10 fell from 50.18% to 33.67% in the period 31 Dec Sept Meanwhile, the number of debtors of the respective clients grew from 342 in 2004 to 688 in mid-september 2006, evidencing the improvement of the receivables portfolio structure. Table 8. Top-10 clients by turnover of factoring assets Share of Top-10 clients by turnover in total turnover 31 Dec Dec Sept Number of debtors of Top-10 clients by turnover 31 Dec Dec Sept Top-1 client Top-2 client Top-3 client Top-4 client Top-5 client Top-6 client Top-7 client Top-8 client Top-9 client Top-10 client Total: The turnover of factoring assets (factoring advances) follows the trends of the receivables turnover. However, the shares of the Top-1 client and the aggregate shares of the Top-10 indicate that NFC, following its internal regulations, finances even smaller shares than the original receivables turnover shares. That reduces the credit risk and evidences that NFC s risk management policy is sensitive to the degree of risk of every debtor. 16

17 Table 9. Top-10 clients by financing outstanding Share of Top-10 clients by financing outstanding 31 Dec Dec Sept Number of debtors of Top-10 clients by financing outstanding 31 Dec Dec Sept Top-1 client Top-2 client Top-3 client Top-4 client Top-5 client Top-6 client Top-7 client Top-8 client Top-9 client Top-10 client Total: Despite a slight increase in the share of financing outstanding per Top-10 clients, the concentration of debtors credit risk significantly fell due to the substantial increase in the number of debtors.. Table 10. Сoncentration of NFC s credit risk per debtors Group of debtors selected by credit risk concentration per debtor, % of the entire portfolio Number of debtors in group Share in total financing outstanding, % % % % % % <0.5% Total: Table 10 evidences that the highest risk concentration group (to which only one debtor is classified) has not changed, remaining on 3-4% level during the last 3 years. The largest group of debtors is the one where financing outstanding is below 0.5% per debtor. Around 65% of NFC s portfolio 17

18 consist of debts with as low risk concentration. According to NFC s internal procedures, irrespective of whether a debtor is a client or not, debtors with credit limits exceeding certain benchmarks fall under strict control of the Credit Control Department where additional requirements, assessment and control procedures (such as, for instance, field audit and/or third parties sureties, etc) might be initiated. Table 11. Additional figures on credit risk concentration and receivables maturities Parameter 31 Dec Dec Sept Dec Number of receivables financed Average receivable amount, RUB , , , ,22 Average financing against receivable, RUB , , , ,96 Average weighted term of receivables in the portfolio (average receivable maturity), days 33,55 41,99 46,49 45,88 Average weighted term of factoring assets (average financing maturity), days 28,85 37,85 41,92 41,89 Table 11 comprises more details on credit risk concentration and receivables maturity. The number of receivables financed in 2006 is 1,4 times higher compared to The average amount of a receivable financed was reduced almost twice compared to 2004, which was due to NFC s policy to develop the business via increasing low-risk part of the portfolio and controlling the maximum levels of limits per client. The gradual increase of receivables maturity terms indicates general trends in the trade market relating to credit terms offered to buyers. NFC operates with receivables maturing up to 120 days at maximum (the existing international practice approves up to 180 days). The indicated averages stand far below the maximum term and provide for fast moving assets. Up to the present moment, the Company has not written off any of its accounts receivable as bad debt. Risk factors The main risk factors emphasized by NFC are the following: Credit risk of NFC debtors. NFC constantly estimates and controls credit risk of separate debtors and groups of debtors. Credit risk management decisions are taken by the Risk Management Committee and the Credit Committee. Strengthening competition in the factoring market, an increasing number of competitors. To reduce the risk, NFC extends its range of factoring transactions and establishes new representative offices in Russia. 18

19 Company liquidity risk. NFC implements day-to-day monitoring and adjustment of its liquidity on the basis of information on its assets and liabilities and a cash flow schedule. The Company maintains the volume of liquid assets sufficient to meet its obligations. Insufficiently developed Russian legal base and court practice in the field of factoring The risk of unfavorable interest rate changes in the capital market. In case of such events NFC modifies its investment source base to reduce the cost of borrowing. Currency FX rate risk For risk management description please see Part II. Overview of the Borrower, Chapter 5. Operational review of the Borrower, section Risk management. Representative office network NFC has developed a broad network of regional (representative) and international offices to facilitate its regional clients in the presentation of documentation and its review. The regional network provides NFC with a strong competitive advantage, as its representative offices are located in each of the main business centers of the country. In order to further enlarge its client base, NFC intends to develop regional credit control and receivables management. The network also allows the Company s clients to increase sales in new geographical regions, as debtors can present the required underlying documentation directly to a regional office of NFC. In general the Company considers its regional representative office network complete though it looks at opening additional offices in line with its client base development. NFC operates via 19 representative offices (including the central office in Moscow) and two offices in the CIS (Moldova and Armenia). Please see below the chart showing NFC s presence in Russia and the CIS: 19

20 The representative offices are consolidated into regional divisions: I. Volgo-Vyatka: - Kazan - Samara - Nizhniy Novgorod II. South - Saratov - Rostov-on-Don - Voronezh III. North-West - St Petersburg - Murmansk - Arkhangelsk IV. Ural - Ekaterinburg - Tyumen - Chelyabinsk - Perm - Ufa V. Siberia - Krasnoyarsk - Novosibirsk - Omsk. Being the latest opened regional office, Yaroslavl representation currently reports to the Manager of the central office Sales Department. 20

21 Table 12. Receivables turnover by representative office, USD Representative office 31 Dec Dec Sept Moscow , , ,33 St Petersburg , , ,04 Ekaterinburg , , ,34 Kazan , , ,57 Novosibirsk , , ,10 Saratov , , ,19 Voronezh , , ,76 Krasnoyarsk , , ,68 Samara , , ,61 Chelyabinsk , , ,83 Rostov-on-Don , , ,14 Perm , , ,42 Ufa , , ,34 Tyumen , , ,76 Nizhniy Novgorod , , ,69 Omsk , , ,10 Yaroslavl , , ,84 Arkhangeslk 0,00 0, ,41 Murmansk , , ,11 Kishinev (Moldova) , , ,90 Total: , , ,16 Operational procedures and risk management Compliance NFC follows the know your customer requirements described in Federal law No. 115-FZ dated 07 August, 2001 "On combating against the legalization of illegal earnings (money laundering) and the financing of terrorism, which the Company complies with, and in NFC s Internal Control Regulations to Prevent Money Laundering and Financing Terrorism. The Regulations require clients to provide information for a questionnaire (client form) subsequently input into the Bank s internal Electronic Document Interchange (EDI) system. The Company verifies and renews the information according to the Bank of Russia Reference 137-Т dated November, Client details in the client form should be renovated regularly, not less than once a year when assessing the risk of criminal money laundering by the client as high and not less than once in three years in other cases. Client risk assessment is made in accordance with risk management standards accepted in the Bank. 21

22 Application and approval procedures New and existing clients/debtors (end buyers) applications, assessment, approvals and systematic reviews are regulated by the following internal documents of NFC: (1) Statute of the Credit Committee. (2) Principles of the Credit Limits Assessment. (3) Regulations of the Cross-Department Document Interchange. (4) Internal Control Regulations to Prevent Money Laundering and Financing Terrorism. (5) Internal edicts of the Chairman of the Management Board. NFC credit assessment procedures are based on the analysis of records and relationship for both clients and debtors carried out by 6 departments: Sales Department and/or Operations Department (the initiator), Credit Control Department (CCD), Risk Monitoring Department (RMD), Credit Assessment Department (CAD) and Underwriting Department. Sales Department analysis includes general information resulting from negotiations with a client, an overview of its sales/marketing and credit management policy, structure of the company, location of offices and warehouses, relations with banks, reasons for factoring services, commission scheme and operational costs estimation compared to risk level forecast etc. Operations Department provides retrospective reviews of existing clients/debtors operations including turnover, financing provided, financing outstanding, performance of obligations under current facilities, credit terms, actual debtors payment terms, receivables breakdown by debtors, debtor indirect payments alerts etc. CCD reviews the business reputation of a client/debtor, analyzes market information about the company, its managers and shareholders, reviews registration and constitutive documents, powers of attorney, estimates probability of frauds, bankruptcy and insolvency. CCD s officers are distributed over the whole chain of NFC s representative offices reporting to CCD executive manager. Collection Department manages phone calls to debtors reminding/requesting payments in case of certain days overdue. Collection Department acts as a regular payment reminder for debtors. RMD monitors NFC s statistics in respect of clients/debtors payments, payment arrears, shortfalls and events of default as per factoring agreements and sales contracts, verifies/reconciles receivables to identify frauds and any sort of mismatches that may cause material adverse effect to NFC. RMD is aimed at identifying and preventing client risks throughout the factoring transaction, such as frauds, insolvency etc. CAD presents credit limit assessments and risk category estimations based on clients/debtors financial performance. Credit assessment is carried out in the context of NFC s automated credit 22

23 scoring/rating systems, including analysis of balance sheets, P&L reports and client/debtor questionnaires. Underwriting Department consists of underwriters, each of whom is entitled to grant/review limits (only) on debtors, making decision based on information prepared by CCD taken from NFC s factoring EDI system, market, sector, region analysis and other information available. Underwriters approve or review limits (requested by sales officers or operation managers) at their sole discretion in scope of limits granted to them by the Chairman of the Management Board. Initial assessment/approval. NFC runs initial credit assessment procedures based on analysis of files relative to a prospect/client or its debtor, prepared by 3 departments: Sales Department (the initiator), Credit Control Department and Credit Assessment Department. The Sales Department report includes general information on results of negotiation with a prospect, overview of the prospect s sales/marketing and credit management policy, structure of the company, placement of offices and warehouses, relations with banks, reasons for the application for factoring services, commission scheme and operational costs estimation compared to risk level forecast etc. Sales Department is responsible for receiving from client and submitting to the Credit Committee the application form and all related documents. CAD presents credit limit assessment and risk category estimation based on a prospect s (client s)/debtor s financial statements. Credit assessment is handled in scope of NFC s automated credit scoring/rating system including analysis of balance sheets, P&L reports and special questionnaires. CCD indicates business reputation of a prospect (client)/debtor, analyzes market information about the company, its managers and shareholders, reviews registration and constitutive documents, powers of attorney, and analyzes sales contracts and shipment documentation. Review/Reassessment Each file approved by the Credit Committee (CC) is subject to regular reassessment and monitor at CC meetings throughout the whole period of factoring operations with it. At the file review sales reports are substituted by operations reports prepared by appropriate operations managers and providing retrospective view on different aspects of operations with an existing client/debtor such as turnover, financing released, financing outstanding, credit terms, actual debtors payment terms, receivables breakdown by debtors (shares), debtor indirect payments alerts, documentation interchange details etc. RMD also provides its own report where it estimates the probability of frauds, bankruptcy and insolvency of clients. 23

24 Credit Committee activity Credit Committee meetings are held 4 times a week in different combinations. Regional CCs consider files related to exposures of limits initially approved by the Chairman of the Management Board for certain regional divisions, and with a single debtor share of under 20% of the client s receivables portfolio. All decisions taken by the regional CCs are subject to RMD approval. Extended CC is entitled to consider files with the total exposure of under USD 1.5 mln and up to 30% of debt concentration per debtor in the client receivables portfolio. Senior CC considers files with exposure exceeding USD 1.5 mln and the share of a single debtor of over 30% in the client s receivables portfolio. Senior CC is entitled to consider complicated transactions and all other issues related to NFC credit risk. Lending policy and disbursement As mentioned above, NFC s CC is the only internal body entitled to approve/reject new or existing clients. According to the Company s procedures, a client s overall exposure is the aggregate of credit limits approved on each debtor. Each time a new debtor is launched or limit upgrade is required the initiator (sales department/operations department/regional office) applies to an underwriter. The underwriter is entitled to approve a limit on a debtor at his own discretion in scope of the limit granted to him. The underwriter considers CCD s reports, factoring EDI system figures, market sector information and other information available on a debtor. CCD includes officers both in the central office and each of the regional and offshore offices. Such approach provides for better control over probable frauds. Credit limits on debtors are defined for each group of debtors, with the maximum lending limit of 90% of the receivables face value (lending limits) for the first group of debtors. Debtors are classified into mentioned groups in view of their payment performance. The upper (first) group includes debtors regularly paying either in advance or in time or with short delinquencies. Debtors paying longer overdue than the stipulated days for the first group are classified to the second group. The third group contains debtors whose payment delays are longer than admitted for the second group. Receivables to debtors performing longer delinquency than the debtors in the third group, are not financed. This information is communicated by NFC to its client within 2 business days following master documentation signing. All debtors are qualified to the three groups mentioned above, indicating the maximum ratio of financing against a receivable, subject to their payment discipline. A debtor may be moved to a higher or a lower group. A client may request an increase in the existing lending limits related to its debtors, and the Company informs the client about its decision within 5 business days following the receipt of such 24

25 a request. Once the master documentation is executed and debtors limits are approved, the client may approach NFC requesting factoring financing in respect of a particular contract with an approved debtor. As a condition precedent for the financing, at least three business days following goods delivery under the contract the client submits to the Company the following underlying documents: Documents specific for the contract trade documents (bills of lading, consignments, etc.), which contain assignment notification and reference to the сontract under which the delivery will take place; commercial documents (invoices); insurance policies, if applicable; Other documents agreed between NFC and the client. General documents Notice of assignment, countersigned by the debtor, containing account details of NFC and instructions to the debtor to make payments via NFC s account; Notification re the new purchaser (debtor form); the contract with all amendments and annexes; a copy of the debtor s certificate of state registration; a copy of the debtor s licenses, if applicable. Confirmation of goods receipt by the debtor and confirmation by the debtor of no claims to the client in respect of the quantity, quality and delivery time of the supplied goods. NFC s lending policy implies control over a number of factoring operations aspects, in particular including: regular review of the conditions and limitations settled in respect of each client, regular review of debtor limits for each client by underwriters or respective CC, sales contracts assessment and control over the due execution of shipment documentation, lending limits variation in view of the respective debtor performance, limitation of the maximum share of exposure per debtor and minimum number of debtors in the client s receivables portfolio, limitation of credit terms as per the sales contracts applicable for financing. Risk monitoring plays an important role in NFC s lending policy. RMD permanently monitors factoring transactions, debtors and clients payments, various ratios, controls operations and indicates signs of frauds. RMD is situated in the central office. The monitoring is based on the track records of the factoring EDI system and regular verification/reconciliation of debtors indebtedness. Subject to RMD s decision, financing of any client/debtor can be temporarily stopped and the related file urgently submitted to a special CC meeting. RMD also provides for additional control over the proper way of NFC s procedures application, the operation managers and CCD s operations. RMD puts particular efforts in the following: 25

26 control of inadequately fast growth of shipment value, monitoring of the structure of payments in terms of third parties payments, monitoring of goods returns and debtors claims to clients, monitoring of debtors direct payments to clients (instead of payments to NFC accounts), verification/reconciliation of receivables control over clients execution of the shipment obligation and ascertaining receivables enforceability. Receivables management handled by CCD acts in favour of both clients (it is one of the core services for clients in factoring) and NFC risk management. CCD s efforts provide for important information for CCs and underwriters for decision making. Receivables management allows to identify frauds or potential risk of losses connected with high risk of client s/debtor s business policies, changes in their structure, losses etc. Factoring receivable repayment and collection An important part of receivables management aimed at due receivables repayment is the appropriate initial investigation and assessment of debtors provided by CCD, which enables to avoid a certain part of probable future clients/debtors payment defaults and frauds. NFC has accumulated an essential database related to hundreds of clients and dozens of thousands of debtors, which also assists in decision making and collection approaches. According to the master agreement for general terms of factoring services in Russia, the factor (NFC) is entitled to receive payments from the clients debtors to NFC s accounts. In case a debtor fails to pay a receivable in full by the maturity date, after a certain extended term (waiting period) specified in the respective factoring agreement NFC obtains the right to call for repayment from the client. The procedure of receivables enforcement and receipt includes the following steps: (1) Receivables management including client and/or debtor financial standing monitoring and dunning in case repayment is overdue, as well as settling monetary claims and seeking for alternative ways of receivables repayment. (2) Activities on pre-trial receivables enforcement (negotiations with clients and debtors, addressing claims, etc). In case there is evidence of committing fraud by a client s/debtor s officials, the factor sends a claim to law-enforcement authorities to institute criminal proceedings. (3) Litigation and court proceedings. Examination of factor s claims addressing debtors and/or clients in order to get court orders for receivables recovery. (4) Enforcement of judgment. Bailiffs and executors determine the clients/debtors property and accounts availability and levy distress. Monetary assets are subject to writing off in favor of the factor and property is subject to auction sale with subsequent transfer of the amounts received to the 26

27 factor s account. Enforcement of judgment is provided by an executor within two months from court order receipt. Reporting and provisions policy NFC s provisioning policies have been developed in accordance with the guidelines and recommendations of its auditors. Portfolio approach is used in determining loan loss reserve which is formed on the basis of historical data on overdue loans in the previous 3 years. The review is subject to the following conditions: 1 st condition: historical statistical data on past due loans in the entire portfolio are broken down by industries and a default ratio (a hypothetical percentage of loans of a certain category supposed to become non-performing) is determined for each industry and applied to the relevant industrial segment of the current portfolio. 2 nd condition: the loans past due for more than 90 days and exposures to clients or debtors showing first signs of financial or operational difficulties should be separated from the entire portfolio; such loans are subject to 100% provisions. Treasury & Risk management Management of the Treasury Operation Directorate is carried out by the Head of Directorate and in his absence by the Deputy Head of Directorate appointed and dismissed by the Chairman of the Management Board and reporting directly to the Chairman of the Management Board. The Treasury Operation Directorate includes (1) Credit and Debit Operations Department and (2) Operation and Calculation Support Department. The primary objectives of the Directorate are: management of the Bank liquidity; credit and debit operations; making accounts and settlements; developing necessary documentation; establishing contractor relations with financial institutions. The Bank s representative offices neither run their own balance sheets nor implement credit activity, thus all treasury functions are concentrated in the head office. Liquidity management (1) Procedure of daily liquidity control The Treasury analyzes the Bank liquidity condition on a daily basis. 27

28 An employee of the Treasury defines excess/deficit of instant liquidity at the beginning of each business day. For this purpose, the difference between highly liquid assets and demand liabilities is calculated. The Treasury daily informs the management of the assets and liabilities structure at the beginning of a business day with changes compared to the previous day. The Treasury makes up a payment plan for the day. Information on current liquidity of the Bank is collected. (2) Procedure of periodic liquidity control At least once a week the Treasury estimates current, long-term and total liquidity and analyzes the risk of liquidity loss. Special liquidity control is implemented, which is necessary as the Bank carries out certain urgent transactions (allowance of credit, urgent deals in the exchange or inter-bank credit market, operations in the stock market etc.), and also applied in case adverse trends are discovered. The following methods are applied for liquidity analysis: - Analysis of liquidity risk using the obligatory economic standards N2-N4 established by the Central Bank of Russia; - Analysis of liquidity risk caused by discrepancy in repayment terms of claims and liabilities; - Analysis of the influence of foreign exchange operations on the current and future liquidity, considering possible adverse changes in exchange rates; - Analysis of the profitability of credit and other operations, estimation of the cost of resources for preventing conflict of interest between liquidity and efficiency of the Bank; - Analysis of the influence of possible adverse developments in liquidity. For liquidity loss risk assessment, the degree of the Bank s dependency on inter-bank risk, credits and deposits attracted from other clients and the Bank s own obligations (debenture) are detected. The change of the attracted facilities structure in the general liabilities amount is analyzed in dynamics. In analyzing liquidity loss risk, the degree of conformance of claims and liabilities to repayment terms is assessed. On the basis of data forecast, the Bank forms a schedule of cash inflows and outflows. (3) Analysis of the influence of foreign exchange operations on current and future liquidity, considering possible adverse changes in exchange rates An abrupt change of assets and liabilities costs expressed in one currency as a result of the change of the ruble exchange rate can significantly impact liquidity. The Treasury regularly (monthly) makes a forecast of foreign currencies exchange rates for forthcoming periods to estimate the influence of foreign currency transactions on current and future liquidity of the Company. 28

29 (4) Analysis of the influence of possible adverse developments The Bank s liquidity can be influenced by risks resulting from non-standard situations in financial markets (sudden change of the economic model, political and economic crises etc.) Such risks are most probable under high concentration of similar lenders in the Bank s liabilities: credit institutions; clients corporations; clients individuals. Liquidity analysis reveals the degree of the Bank s dependency on the inter-bank market, funds attracted from other clients and its own obligations. (5) The order of emergency measures under liquidity loss threat (1) In case liquidity loss threat is revealed, the Treasury immediately informs the Risk Management Committee and the Chairman of the Management Board. (2) A meeting of all relevant subdivisions of the Bank is set up to estimate the situation, work out emergency measures and assign responsibilities. (3) The Chairman of the Management Board is immediately informed of all measures taken, in case it is necessary to make decisions requiring higher competency, and a meeting of the Board is set up. (4) If the Management estimates the situation as capable of changing into a critical one, the Board of Directors is immediately informed. (5) In case of current liquidity loss or a steady decline in liquidity, the Treasury must inform the Risk Management Committee. (6) The Risk Management Committee is obliged in top-priority order to examine the question of liquidity, affirm the list of measures and those responsible for their implementation. The Risk Management Committee is obliged to control the implementation of the measures. (7) The plan of actions on liquidity recovery can involve the following: short-term credits (deposits) attraction; long-term credits (deposits) attraction; subordinated loans attraction; liabilities restructuring; restriction (or cessation) of lending for a certain period; assets restructuring, including selling part of the assets; restriction or cessation of the expenses; increase of the statutory fund of the Bank. (8) Supervision of compliance with liquidity management policy and procedures (1) Supervision is organized for compliance with liquidity control and estimation requirements specified in the corresponding regulation of the Bank. (2) Supervision is realized by employees and executives of all subdivisions whose decisions influence liquidity. The Bank appoints employees of the internal supervision service directly responsible for the realization of compliance with liquidity control. 29

30 (3) The Bank s internal supervision system has the following duties: checks for the adherence to liquidity control procedures. The checks are conducted according to the corresponding schedule, at least once a year; estimation of the quality of management decisions relating to liquidity; informing the management bodies, the Chairman of the Management Board, and the Board of Directors of all violations revealed; controlling the implementation of management bodies decisions for eliminating the revealed violations. The Treasury personnel The Treasury Director, Mr Evgeny Tumanov, has been working in the banking sphere since Mr Tumanov has a higher education and work experience in Rossiyskiy Kredit Bank, Bank MENATEP Spb, NIKoil IBG Bank. Ms Susanna Aleksanina, Deputy Treasury Director, has been working in the banking sphere since Ms Aleksanina has a higher education and work experience in METKOMBANK, the CentroCredit Bank, Bank MENATEP Spb. The rest of the Treasury employees have a higher education and work experience in the Bank for at least 1.5 years. Risk management NFC s risk management procedures are based on due control and mitigation of credit, currency, liquidity, interest and operational risks. In this respect, the Management Board, the Credit Committee, the Risk Management Committee, the Treasury, the underwriters, the Credit Control Department, and sales and operations managers undertake various measures to foresee, control and mitigate existing risks. (1) Credit risks The Bank is subject to credit risks including the Bank s contractors being unable to redeem their indebtedness in proper time and amounts. The Bank adjusts the level of credit risk by restricting the provided amounts possible in respect of one borrower or a group of borrowers, as well as in respect of geographical and industrial sectors. The Bank regularly conducts the analysis of such risks and revises them at least once a year. The level of credit risk on particular borrowers, including banks and investment companies, is also limited by additional sub-limits covering risks on balance and off-balance positions revised by the Risk Management Committee, the Credit Committee and the Management at least once a week. The actual execution of quotas is checked on a daily basis. The Bank manages credit risk by means of regular analysis of its borrowers credit risk and by receiving credit security. (2) Currency FX rate risks The financial situation and cash flows of the Bank are affected by fluctuations of foreign currency exchange rates. The Risk Management Committee carries out general supervision of exchange rate 30

31 risks and fixes quotas on operations in foreign currencies performed by subdivisions of the Bank. The Treasury Operation Directorate forecasts and analyzes opened balance and off-balance currency positions. The main policy in currency risks control is to keep the correlation of attracted liabilities and placed assets in one currency. (3) Liquidity risk The Bank s Risk Management Committee performs general supervision of liquidity risk. The current supervision is performed by the Treasury Operation Directorate. The following actions are realized at the Bank to efficiently control liquidity risk: liquidity forecast is made on a daily basis; placing funds is realized considering the urgency of the forthcoming placements and the remainders of attracted resources; analysis of the direction of the clients financial flows for revealing seasonal and other principles is carried out on a constant basis; stress-testing for analysis of possible consequences of adverse low-probable events is performed. For more information on liquidity risk please see Part II. Overview of the Borrower, Chapter 5. Operational review of the Borrower, section Liquidity management. (4) Interest rates risks The periods of repayment of assets and liabilities and the ability to substitute interest liabilities at an acceptable cost are important for estimating the Bank s susceptibility degree to interest rate changes. Control of interest rates risk by means of developing limited interest rate and tariff values on attracted and placed resources is implemented by the Risk Management Committee and the Credit Committee. IT and infrastructure NFC has been developing the EDI system named NIK Factor and its derivatives E-Factoring and Electronic Factoring. The mentioned systems play an exceptionally important role in the daily operations of NFC (like an EDI system in any strong factoring company), combining the interface for registering, financing, clearing invoices, decision making for underwriters, analyzing statistics, internal communication between departments, reporting to clients, document interchange with clients. The EDI system is integrated through all NFC regional and foreign offices. 6. International borrowings NFC established track record in international fundraising in 2005, concluding loan transactions with the following international banks: Raiffeisenbank, October 2005 loan RUB 100,000,000 with 1-year tenor 31

32 Standard Bank, November 2005 loan RUB 300,000,000 with 1-year tenor Raiffeisenbank, September loan RUB 200,000,000 with 1-year tenor Standard Bank, December loan RUB 300,000,000 with 1-year tenor In May 2006 NFC successfully placed its bond issue of RUB 1 bln with 3-year tenor and 1-year put option embedded. The coupon rate for the 1 st year of circulation was set at 9,8% annually. There were several international investors in the portfolio. In July 2006 NFC successfully involved USD 50 mln syndicated loan with 1-year tenor. 11 banks participated in the transaction. 7. Selected consolidated financial information The data presented below are based on the Company s IFRS financial statements for the years 2004 and 2005 and 9 months ended 30 Sept 2006, as well as the Company s estimation of financial indicators for the year NFC is constantly increasing its factoring advances portfolio. Table 13. Dynamics of factoring advances 30 Sept., Dec., Sept., Oct., Nov., 2006 Thousand RUB 31 Dec., 2006 Factoring advances with recourse Factoring advances without recourse Less Clients counter-claims Less Allowance for impairment Factoring advances In line with the increase in factoring advances, interest income made up RUB 150 million in 2004, RUB 881 million in 2005, and RUB 730 million for 9 months of

33 In 2005 net income went up to RUB 366 million compared to RUB 2 million in For 9 months of 2006 net income amounted to RUB 208 million. Table 14. Structure of interest income and expense Thousand RUB Interest income 9 months of months of 2005 Factoring Debt securities Due from credit institutions Loans Interest expense Due to credit institutions Securities issued Deposits Net interest income The increase in interest expense resulted from debt source modification carried out to lower the dependence on URALSIB Financial Corporation financing. Table 15. Debt distribution by source URALSIB FC 98,63% 75,83% 25,72% Others 1,37% 24,27% 74,28% Salaries, employment benefits, administrative and operating expenses account for the largest share in NFC expenses. 33

34 Table 16. Structure of salaries, employment benefits, administrative and operating expenses Thousand RUB 9 months of months of 2005 Salaries and additional compensation payments Social security costs Salaries and employment benefits Occupancy and rent Business development Marketing and advertising Professional services Communications Operating taxes Other Administrative and operating expenses The increase in salaries was caused by the introduction of «Factoring-Guarant» service which constitutes a warranty by NFC for a client s debtors with respect to a deferred payment supply. Total assets amounted to RUB 5,6 billion in 2005 compared to RUB 3,7 billion in As of 30 Sept 2006, total assets declined to RUB 5,4 billion due to the strong seasonality of factoring business. General business activity declines in summer with subsequent rise in the next months. As a result, fourth quarter of each year shows significant growth of NFC income and assets. Factoring advances have the dominant share in NFC assets. Table 17. Breakdown of assets as of Sept 30, 2006 Cash, cash equivalents and trading securities 13,25% Factoring advances 81,27% Amounts due from credit institutions 4,55% Other assets 0,93% Shareholder s equity (net assets attributable for participants) comprised 33% of total assets in 2005 and 37% as of 30 Sept

35 Table 18. Breakdown of liabilities as of 30 Sept 2006 Amounts due to credit institutions 42,14% Bonds issued 18,58% Statutory fund 26,82% Retained earnings 10,62% Other liabilities 1,84% 8. Credit ratings NFC is rated B- by Standard & Poor s. Below is an excerpt from the agency s release on the Company dated January The ratings on Russia-based National Factoring Company (NFC) reflect its limited customer diversification; relatively high concentration risks; heavy, albeit gradually decreasing, funding dependence on related parties; and short operating history as a stand-alone entity. They also reflect the generally risky operating environment in Russia. The ratings benefit from NFC s leading market position in the domestic factoring sector, high capitalization and profitability NFC s high capitalization with adjusted common equity to assets of 38% at Sept. 30, 2005 will decline rapidly in the medium term due to continued business expansion, but should remain adequate. The small absolute amount of capital (about $60 million at Dec. 31, 2005) could limit expansion opportunities and leave the company exposed to major unexpected credit and operational shocks. NFC reports a relatively high level of single-name credit concentrations, albeit lower than that of most Russian financial institutions. Its credit risk profile is fairly high, as it deals mainly with small and midsize enterprises (SMEs). This credit risk is mitigated to some extent, however, because NFC s business is dominated by recourse factoring, which allows the company to reclaim its advance from the product supplier if the end buyer does not pay. Earnings are currently strong but concentrated by counterparties, and consequently potentially volatile. Pressure on profitability may also come from an interest margin that is likely to narrow rapidly in the near term The stable outlook balances NFC s good commercial prospects against a weak funding profile and concentration risks. As the ratings already incorporate funding and customer diversification in the medium term, the potential for an upgrade depends on NFC s ability to strengthen its stand-alone credit profile and establish a track record for adequate capitalization and profitability. NFC expects the potential interest margin narrowing described above to be compensated by the forecast growth of income from the Company s new services, especially «Factoring-Guarant». 35

36 Appendix. Currency FX rates The exchange rates* at period-end are as follows: 31 Dec Dec Sept Dec Sept USD/RUB* * official rates set by the Central Bank of Russia. 36