HIGH YIELD FIXED RETURNS

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1 PROVIDENCE PREFERRED FINANCIAL LIMITED HIGH YIELD FIXED RETURNS Information (Hong Kong)

2 Providence Preferred Affiliates Canada Greater China OFFSHORE BANK & TRUST LTD. United States / Caribbean OFFSHORE BANK & TRUST LTD. UK / Guernsey Fund Ser v i c e s Latin America 2

3 About Providence Preferred Providence Preferred is a Hong Kong based company specializing in principal protected investment returns. The principals of Providence Preferred own the Providence Group, a diversified global commercial group of companies with over 30 years of experience in financial services, receivable financing, trade in Brazil, China and other global emerging markets. The group has many subsidiaries and branches and has offices in Hong Kong, Taipei, Shanghai, Suzhou, Singapore, Vancouver, Miami, Cayman Islands, London, Guernsey, Istanbul, Dubai, Panama, Puerto Rico, Sao Paulo, Santarem, Porto Allegre, Manaus, Rio Branco, Belo Horizonte and Sertaozinho. Investment Objectives The investment strategy is to generate attractive, uncorrelated, fixed absolute returns from investing in the receivable financing of small and medium sized businesses (SME) in Brazil. For that purpose, Providence Group has 2 Brazilian subsidiaries, Providence Fomento Mercantil, Investimentos e Participacoes, Ltda and BPA Fomento Mercantil, Investimentos e Participacoes, Ltda, to purchase such receivables in the open and longstanding domestic Brazilian receivable financing market. Legal and Protected Company Providence Preferred Financial Limited is a protected company registered in Hong Kong under registration number A protected company is a single legal entity, which has the ability to issue notes as security. These assets are protected under legal contract. Charges There are no fixed charges to clients. London Vancouver Guernsey Suzhou Miami Cayman Islands Istanbul Taipei Tokyo Shanghai Puerto Rico Panama City Santarem Belo Horizonte Dubai Hong Kong Manaus Rio Branco Singapore Sertaozinho Sao Paulo Porto Alegre 3

4 Operating Entities Finance and Trade Fomento Emerging Market Factoring Company Financial Investments Realty Advisors Real Estate Brokerage and Advisory Services Finance and Trade Travel Finance and Trade, China Worldwide Factoring and Trade Finance Global Trading TRADING AND INVESTMENTS Financial Investments Finance and Investment Fomento Emerging Market Trading and Factoring Company Investment Management, Guernsey Education & Enhancement Charitable Foundation Talent Management Mortgage Company / Lending Services Private Equity Wealth Management Medical Equipment, Supplies and Services Fund Ser v i c e s Fund Management and Administration 4

5 About Receivables Financing Receivables financing is universally accepted as vital to the financial needs of businesses. This specialized type of financing has the support of government bodies and central banks throughout the world. Globally, it has become a common and growing source of financing for large corporations and SMEs. This type of financing is used extensively in developed and developing countries around the world, as it has become an important way for businesses to maintain cash flows required for current operations and future growth, as the most simple and direct form of obtaining capital. Many firms find it difficult to finance their production cycles, since after goods are delivered most buyers pay at a later date. Therefore, receivables financing provides SMEs with valuable working capital. Receivable Financing is a Global Practice Total Receivable Financing Volume by Country (in Millions of USD) Argentina 804 Guatemala 301 Portugal 30,062 Australia 64,984 Hong Kong 38,441 Romania 3,825 Austria 14,369 Hungary 3,506 Russia 46,081 Belgium 55,481 India 4,782 Singapore 11,358 Brazil 57,151 Ireland 26,142 South Africa 28,005 Canada 9,301 Israel 1,863 Spain 162,487 Chile 31,440 Italy 238,260 Sweden 43,425 China 450,324 Japan 127,245 Switzerland 3,930 Colombia 5,976 Korea 10,480 Taiwan 91,700 Croatia 2,972 Luxembourg 392 Thailand 5,684 Cyprus 4,389 Malaysia 2,334 Turkey 41,530 Czech Rep. 6,807 Mexico 34,230 Ukraine 1,615 Denmark 11,528 Netherlands 65,500 U.A.E. 3,799 El Salvador 393 New Zealand 786 United Kingdom 381,472 Finland 22,270 Norway 23,731 United States 101,581 France 244,307 Panama 1,116 Vietnam 80 Germany 206,220 Peru 3,026 Greece 16,717 Poland 32,108 TOTAL WORLD 3,682,863 Data Source: Leora Klapper. The Role of Factoring for Financing Small and Medium Enterprises. The World Bank. Case Studies: How Receivables Financing Helps Businesses BRAND & MARK INDUSTRIAL LIMITED Hong Kong Receivables financing in Hong Kong and the Guangdong Region of China has become an increasingly popular form of finance. Never has receivables financing been more important than now, in this period of economic uncertainty and unstable international financial markets. Receivables financing provides the financial flexibility and risk mitigation to help many manufacturers and exporters survive and even thrive in today s economic climate. Brand & Mark Industrial Limited ( B&M ) started its business in Based in Hong Kong with a manufacturing facility based in Shenzhen, the company engages in plastic injection molding, silicone molding, and metal stamping to manufacture nylon kitchen utensils, silicone bake ware, kitchen tools, cutting boards, and seasonal items for major retailers and OEM customers of leading brands in the North American and European markets. The 220,000 square foot manufacturing facility in Shenzhen is filled with state-of-the-art injection, compressing, and stamping machines and employs over 600 well-trained and dedicated employees. The company is focused on providing safe, high-quality, stylish, and functional products at a reasonable price. With China entering the World Trade Organization, B&M employed an international management style coupled with an entrepreneurial spirit. The result was a small-scale factory evolving into one of the leading plastic and metal manufacturers in China with a heavy emphasis on exportoriented sales. With this new focus, came new challenges. B&M sought additional working capital by using their account receivables. The initial need was to obtain credit for the USA customers, particularly those with long payment terms. Since then, B&M has accessed additional financing to expand further into the USA, Canada and Europe. This factoring service provides flexibility on cash flow which facilitates the substantial growth of B&M states Stanley Fong, Managing Director of B&M. With the support of factoring services, B&M can step forward in expanding its customer base in a favorable way, Mr. Fong added. The next time you are preparing a meal in your kitchen, you might want to take a further look at that utensil in your hand. It just might be a B&M product, made in Shenzhen, China, and financed by receivables, all the way to your kitchen. 75

6 Case Studies: How Receivables Financing Helps Businesses IDEAL BIKE CORPORATION Taiwan For decades Taiwan has enjoyed a reputation of being the world s kingdom of bicycles, particularly as leader in terms of manufacturing quality and average unit price. Amongst the numerous bicycle manufacturers in Taiwan, Ideal Bike Corporation is one of the oldest and the largest. Established in 1980 and aided by a successful IPO in 2001, Ideal Bike now assembles and sells over 1.1 million bicycles worldwide from the group s factories in Taichung (Taiwan), Dongguan (China) and Kutno (Poland). Ideal Bike is not only an OEM partner for global name brands but also has a vivid strategy to introduce its partnering brands through continuous R&D and marketing. The global bicycle market has entered into a stage of maturity. Although high oil prices in recent years have contributed to an increasing demand for bicycles, the industry has a low growth rate of 3-5% per annum. For bicycle manufacturers like Ideal Bike, the oversupply and keen price competition has put the exporters under pressure to offer the most attractive payment terms. Letters of credit and cash upfront are becoming rare and instead, open account is now the norm. Fuelled by occasional adverse financial news and insolvency events among the major buyers in this market, Ideal Bike has decided to use receivables financing to hedge itself against the financial risks of selling on open account terms to foreign buyers. The financial manager at Ideal Bike, Miss Julia Lai adds the comment: Because most of our customers are outside Taiwan and as we have to sell on O/A terms, we greatly rely on receivable financing service in the US, Europe and Japan. We feel receivables financing is very professional and reliable. Ideal Bike persuaded their Japanese business partners to also take advantage of this way of working capital financing. The change in procurement terms gives Ideal Bike and their Japanese partners much more financial maneuverability. Simultaneously, thanks to the recommendation of receivable financing, the Japanese partner has gained long-term confidence in working with Ideal Bike. KENMARK INDUSTRIAL CO. LTD. Taiwan Based in Taiwan, Kenmark Industrial Co., Ltd. is an international trading company specializing in the sale of hardware, tools, home furnishings, gardening accessories, electrical & electronic products and general merchandise. The Company is also a manufacturer of ready to assemble products, such as computer workstations, audio-visual and CD stereo cabinets, television cabinets, and game stations. Kenmark was a small sized trading company when established in 1978, but now has production facilities based in Malaysia and marketing subsidiaries in Hong Kong, Malaysia, Singapore, Japan, Europe, New Zealand, Australia, USA, and Canada. In 1992 Kenmark planned a large expansion by entering the home furnishings, gardening, and electronics markets in Australia. Coles Myer, the largest retailer in Australia, was very satisfied with Kenmark s quality products but required Kenmark to provide the logistics and after-sales service locally. It was a great business opportunity, but also a big challenge to us. Mr. James Hwang, the Chairman of Kenmark recalls. I needed to establish a subsidiary in Australia to fulfill my buyers inventory requirements, distribution and after-sales service. However, I also had to consider other issues before undertaking this expansion, such as how to obtain funding support, debt collection and management of the potential credit risks raised by trading on open account terms. In order to solve these problems, we contacted several financial institutions for a solution, says Mr. Hwang. We knew what we needed but it was very difficult at that time to find a partner to fully satisfy our needs. Fortunately, Kenmark secured working capital financing through the use of their creditworthy receivables. Being able to access additional working capital helped Kenmark s growth in Australia. Sales volume, which was AUD 2.0 million at the beginning of 1992, increased to AUD 20.0 million in According to Mr. Hwang, The receivables financing service strengthened our working capital, freed us from the worry of any credit risk of approved buyers. Mr. Hwang concludes, We re fully confident about the future as we not only have excellent products and services, but the receivable financing programme is also helping us continually focus on improvement of sales and service quality, which will enable us to move ahead of our competitors. Source: Factors Chain International 6

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8 Background to Receivables Financing Receivables financing is a comprehensive financial service that includes advisory work on credit, accounting, inventory, collection and management of receivables, and working capital. The challenge many SMEs face is how to convert their creditworthy account receivables into working capital. Receivables financing provides these businesses with working capital to finance their production cycle. These receivables are from the sale of goods or services with maturities ranging from 30 to 360 days. The underlying assets are account receivables, which are purchased by Providence at a discount, less interest and service fees. Providence assumes the credit risk associated with the receivables since this transaction is an outright purchase of the receivables rather than a collateral loan. The key point is the underwriting is based on the credit worthiness of the receivables themselves rather than the risk of the seller. This minimizes the risk for Providence since the company has direct access to the underlying assets. Providence could purchase receivables anywhere in the world but chose Brazil for two strong specific reasons: (1) Safety and (2) Return on Receivables Acquired. Every country has some form of receivables financing. This profitable and secure form of business is not new but rather a business strategy that has been in practice for many generations and many years. Providence has invested the time and resources and has developed and securely maintained close client relationships with the businesses requiring financing. Out of all the growing emerging economies, Providence chose Brazil as the country to expand its receivables financing business. Receivables Financing in Brazil Brazil has one of the world s most advanced banking systems and the financial market is highly regulated. The strict lending laws of Brazil give receivable financing firms an advantage compared to other types of lending, such as collateral loans by fixed assets. Factoring companies function within a framework that is dictated and strictly monitored by the Central Bank of Brazil, COAF (Council for Financial Activities Control) and ANFAC (National Association of Societies of Receivable Financing). A strong legal structure and many safeguards have been implemented and are strictly enforced to ensure that companies, including Providence, have its receivables and operations executed in a proper manner. Receivables financing must be based on commercial sales and is governed by Brazil s Civil Code. It can only be conducted with businesses, and not with individuals. The most common accounts receivables are duplicatas (certified commercial invoices), which account for almost sixty percent of all receivables financing. Duplicatas are a credit instrument directly linked to the underlying assets and not linked to the product risk that originated the duplicate once it is perfected. This type of receivables management is a powerful tool in providing financing to SMEs. The Brazilian government has implemented several regulations to define and regulate this commercial activity. Firstly, the credit system in Brazil takes any form of credit default very seriously. If any individual defaults twice on a credit obligation, such as a post-dated check, the current banking regulation could call for the bank to close that individual s account for up to 5 years preventing the individual/company the access of other forms of credit for the same 5-year term. Their accounts plus all financial credit including credit cards and lines of credit are suspended, pending resolution. Secondly, this suspension or closure not only affects their daily financial needs, it also prevents them from opening any other additional accounts with other banking institutions throughout the country. Further, the complexity of the credit system in Brazil encompasses direct/indirect relationships into the second and third level, for example: a direct default on a credit obligation could affect all direct business relationships. All business partners directly and indirectly associated with the 8 default may also have their accounts compromised, until the default is addressed. These three Brazilian banking regulations are strong deterrents to credit default, as shown by the national default rate at a low average of 1.99%. Providence is one of several companies that have direct access to the wide range of credit information available through several databases including the Central Bank, where they have the ability to conduct credit checks on the issuer of the receivables acquired. Investigating and verifying the credit worthiness of the issuer helps Providence monitor its own risk management by reducing its credit risks. This important access to the available credit information helps strengthen the Providence and client relationship. Each stage of due diligence mitigates potential risks and makes the entire transaction process as comprehensive as possible. Working in this stringent, transparent, and industry respected framework provides a proper business environment where there is contractual and legal recourse to default. As a result, permanent default is very low in Brazil, the world s 6th largest economy. There are over seven hundred receivables financing firms in Brazil, which provide services to more than 65,000 SMEs. Eighty percent of these enterprises belong to the industrial sector, with a monthly turnover of around USD5.5 billion. Receivables financing have more than 6,000 employees and are estimated to provide another 70,000 indirect employment opportunities. Thus, receivables financing in Brazil is an important source of financing for SMEs. 3.00% 2.00% 1.00% 0.00% Default Rate Default Rate

9 Receivables Financing in Brazil Receivables Financing in Brazil Key Points Receivables financing (factoring) is an important alternative to the banking sector for the financing of small and medium enterprises. As access to the current banking system becomes increasingly more difficult, receivables financing (factoring) companies have found an important market niche. Receivables financing (factoring) companies work in close association with their creditors providing a wide array of services from collections, to accounts receivables management, to trust services. While accounts receivables are in essence future cash flows, most businesses in Brazil and other places in the world, have a need for immediate cash to fund operations. These companies can mitigate the risk of cash flow shortages by selling part of their accounts receivables to a factoring company. Credit cards in Brazil carry the highest interest rates in the world. These fluctuate between ninety percent ( 90% ) per year for the top credit clients and up to 290% or more per year ( HSBC Premier, Santander Gold ) for the average credit client. For these reasons, post-dated checks are still the best way to buy on credit. * Data from Bloomberg * * * * * * Based on initial principal of USD100,000 at the beginning of Providence has two licensed receivables (factoring) financing companies in Brazil and are members of ANFAC ( Brazil s national trade association covering all receivable financing companies in the country). More specifically, Providence owns two of the three foreign entities that hold such membership in Brazil due to Providence s excellent reputation, strong operating procedures, state of the art systems and control, past operating history in Brazil, and solid financial references. BPA Fomento Mercantil Investimentos e Participações, LTDA. and Providence Fomento Mercantil, Investimentos e Participacoes, Ltda are wholly owned subsidiaries of Providence group of companies and operate the receivables financing (factoring) business. Data Source: Central Bank of Brazil Due to high bank lending rates, receivable financing enables quick and, by Brazilian standards, relatively inexpensive access to financing. Whereas an annual receivable financing interest rate of 54% for any loan product is considered unacceptably high in many developed Western economies, in Brazil it is regarded as the cheapest form of financing available to the average borrower. Alternative sources such as bank credit based on the discounting of invoices, personal or consumer overdraft facilities or credit cards, are much more expensive. 9

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11 Brazil Unlimited Potential During the 1990s, the Brazilian economy did not experience the same level of robust growth as other major emerging economies like India, Russia and China. But in the last two decades Brazil has evolved to become the 6th largest economy in the world (surpassing the UK in December 2011) and has been growing at an average rate of 2-5% per year. Beginning shortly after the settling of global economic changes and the election of Luiz Lula Da Silva in the 2002 Brazilian presidential elections, economic growth has been consistent and supported by a development cycle of significant investments. As the largest and most populous country in South America and the fifth largest country in the world in both area and population, Brazil is well-positioned for those positive trends to continue. The nation has well-developed manufacturing, mining, agricultural and service industries, as well as a large labour pool and as a result foreign investors are seeing Brazil as a strong alternative to invest money into the economy. In this short time Brazil has gone from being a borrower nation to being a contributor to the International Monetary Fund and now has a large trade surplus averaging USD30 billion. Although Brazil s household debt-to-income ratio has been increasing recently, at around 40% it compares favourably with the advanced economies of the UK at 166%, the U.S. at 125% and Japan at 126%. The government of Brazil is stable and the inflation rate has been under control for the last 20 years as a result of policies instituted by its Central Bank. Brazil has also been able to build up significant reserves in excess of USD350 billion which will mitigate the effects of further deterioration in global economic conditions. In no small part, Brazil s positive and steady transformation has been due to its thriving receivables financing industry that provides the liquidity spurring the growth of Brazil s small and medium sized businesses. Receivables financing has been a way of life in Brazil for decades, and due to severe governmental sanctions, the default rate of financed receivables in Brazil is a low average of 1.99%. The good news about Brazil just keeps on coming. It has an increasing balance of payments surplus, continued government commitment to fiscal discipline, very low political risk, inflation control, increasing export volume growth, decreasing interest rates and strong foreign direct investment, all of which are expected to continue to strengthen the economy and fulfill the prophesy of Brazil being the country of the future. Growth and Safety Key Points The Brazilian economy enjoys a positive outlook. Emerging markets in general, and Brazil in particular, enjoyed a fast recovery from the 2008/09 global financial crisis and today, Brazil, due to its uniqueness, offers many exciting and stable opportunities as the most dynamic of the BRIC economies. It has an investment grade credit rating from all major credit rating agencies following nearly 20 years of conservative economic policy and is a lender to the International Monetary Fund. Its exports and retail sales are increasing, its inflation is under control, there is continuing and sustainable economic growth, a stable political environment, expanding lower and middle economic classes and increasing demand for consumer credit. Foreign direct investment increased 560% between 2003 and 2011, GDP per capita is increasing and unemployment rates continue to fall. Brazil is the second most popular global destination in terms of FDI value and fifth in terms of FDI projects. The US, Canada, China, UK, Japan, Germany, Netherlands, and Spain accounted for 77% of the FDI projects in China is emerging as a strong partner of Brazil, with the largest share of FDI and trade between the two countries. Brazil is energy independent and in 2006 the world s largest offshore oil reserve (Lula Oil Field) and in 2008 one of the world s largest natural gas field (Jupiter Field) were discovered off the coast of Rio de Janeiro. Brazil has successfully hosted the 2014 FIFA World Cup and will host the 2016 Olympic Games with an anticipated combined positive contribution to the country s economy of over USD135 billion. 11

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13 Providence Group Growth Unlimited Global economics affects everyone. The world economy is linked directly and indirectly. No matter where you live or what you decide to do with your money, current economics will impact you and your financial institution. Many companies still function under the old belief system that one-sided profits are the only driver of sustainability. In the last 5 years many companies using that philosophy have struggled, restructured, or simply went out of business while Providence has been implementing a different view and has consistently grown at a 25 to 30% rate, year after year. Providence has always delivered value and trust in the global marketplace to all lenders and business partners through four main philosophies: Provide alternative lending possibilities/ opportunities Deliver consistent value and honouring its obligations to clients, associates and partners Corporate stability and diversification by building and implementing a strong back-office accountability Building at the same time social and corporate responsibility Every company needs to have a platform of social responsibility where business relationships and fiduciary responsibility are non-negotiated priorities. Providence only participates in business relationships that are mutually beneficial for all parties involved. Providence approaches all relationships based on the notion of capital preservation with extensive research and due diligence by performing extensive background research with respect to company s management, business feasibility and financial health. Providence is able to mitigate risks and focus on long-term, sustainable businesses with healthy margins and contribution. This brings, in essence, an inherent stability to the group of businesses. Providence mitigates risk and volatility by diversifying their various businesses across many industries. These industries are diversified into business consulting, financial services, manufacturing entities, and global commodity trade. Diversified industries and geographic regions help to hedge the receivables industry. Comprised of former bankers, real estate developers, attorneys, global business strategists, and financial executives, Providence is properly positioned to capitalize on the collective skills of their management team and associates to deliver a win-win for all. Every company has the desire to grow but having a growth strategy that is aligned with its core philosophy is a must. Providence will continue to steadily grow by simply applying its business model created from inception. Their proven formula to becoming an expert in any field: Build upon 1 or 2 target markets at a time and multiple points of profit within them, Constantly look for niche opportunities that can create a mutually beneficial outcome, Safety and Consistency beats short-term higher returns, Invest in relationships, innovation and education, Having a global aspiration with a strong local presence, Create sustainable distribution channels and longterm relationships based on an evolving, consistent and safe track record Providence Group performance yesterday, today and tomorrow. 13

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15 Due Diligence General Information This document has been issued and approved by Providence Preferred. Although information and any opinions in this document have been obtained from sources believed to be reliable, Providence Preferred does not represent or warrant their accuracy, and such information may be incomplete or condensed. This publication is for private circulation and information purposes only and does not constitute a personal recommendation or investment advice or an offer to buy and sell. Note holders should not treat the contents of this information brochure as advice relating to legal, taxation, investment, or other matters. Business Service Providers Administrator Providence Fomento Mercantil, Investimentos e Participacoes, Ltda Edificio Palladio Rua Fidencio Ramos 223 Suite 74, Vila Olimpia, Sao Paulo, Brazil Lumiere Fund Services PO Box 268 Mill Court, La Charroterie, St. Peter Port, Guernsey Auditors Ernst & Young 22/F CITIC Tower 1 Tim Mei Avenue Central, Hong Kong Pricewaterhouse Coopers CI LLP PO Box 321, Royal Bank Place, 1 Glategny Esplanade, St. Peter Port, Guernsey Bankers HSBC (Central West) 8/F, Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Sheung Wan, Hong Kong, China HSBC (China) Room 1505, Century Financial Tower No. 1 Suzhou Avenue West, Suzhou Industrial Park Suzhou, Jiangsu, China DMS Offshore Bank & Trust Ltd. DMS House 20 Genesis Close Grand Cayman Cayman Islands The Royal Bank of Scotland International Limited PO Box 62, Royal Bank Place 1 Glategny Esplanade St. Peter Port, Guernsey First Commercial Bank of Taiwan No. 18, Xinyi Rd., Sec. 5, Xinyi District, Taipei, Taiwan Manager Providence Preferred Financial Limited Unit 1202, Level 12, 1 Peking Rd., Tsim Sha Tsui, Kowloon Hong Kong, China Legal Advisors Deacons 6F, Alexander House, 18 Chater Road, Central, Hong Kong, China Bird & Bird 4/F Three Pacific Place 1 Queen s Road East Hong Kong Lee and Li 7F, No. 201, Tun Hua N. Road Taipei 105, Taiwan Jun He Law Offices 25/F, Tower 3, Jing An Kerry Centre 1228 Middle Yan an Road Shanghai, China Formoso Murias, P.A. One Unity Square 401 SW 27th Avenue Miami, Florida, USA This information brochure does not constitute a general offer to the general public. Qualified individuals who want to learn more about Providence and their current trading practices should contact the nearest local Providence office, or visit

16 Hong Kong Unit 1202, Level 12, 1 Peking Rd., Tsim Sha Tsui, Kowloon, Hong Kong, China Taipei Unit E-1, 38/F, No.7 Xinyi Rd., Sec. 5, Xinyi District, Taipei 101 Tower, Taipei, Taiwan Shanghai Suite 2929, Level 29, Tower 1, No.1515 Nanjing West Road, Jing An Kerry Centre, Shanghai, China HONG KONG