Share of Oil&Gas in GDP decreased by 2.1x</li></ul>Crisis 2008: <br />CBR reserves: $430 bn<br />GDP2008: $1,670.3bn<br />Oil&Gas: 9% of GDP<br />Net private sector capital outflow, $ bn<br />Crisis 1998:<br />CBR reserves: $8bn<br />GDP 1999: $196bn<br />Oil&Gas: 18.7% of GDP<br />3<br />Source: Central Bank of Russia <br />
Russian Economy is back on track<br /><ul><li>GDP growth: 2Q09 +0.1%, 2010E +5% .
Destocking the major reason for GDP decline (9.1% of the total 10.4%).
The CPI is flat since August. YTD inflation is at 8.1%, versus 11.5% a year earlier.
RTS increased 2.3x since Feb 2009. </li></ul>%<br />%<br />CBR Reserves<br />+ 15% (+$58bn to $430bn)<br />25% (+$120bn to $600bn)<br /> -37% (-$224bn to $376bn)<br />4<br />Source: RTS, CBR, NRG calculations<br />
Russian banking system structure<br /><ul><li> State banks share of total corporate loans increased from 49% to 62% since August 2008
TOP 20 banks - 77% of corporate loans. </li></ul>Loans to corporate sector, $ bn<br />62.1%<br />100.0%<br />75.5%<br />23.3%<br />10.2%<br />10.2%<br />5.6%<br />4.0%<br />4.4%<br />4.5%<br />5<br />
Russian banking system – liquidity problems for next 2-3 years <br /><ul><li>New money is not available from the banks
Private banks have problems with capital, because of losses and NPL
Total banking capital $50bn. Additional capital up to $70bn could be required. </li></ul>Sources of credit organisations, $ bn<br />6<br />Source: Central Bank of Russia <br />
Interest rates rise <br />Corporate lending rates in Russia<br /><ul><li>The borrowing rate for companies in ruble terms has gone up from 10% to 20-25%
The borrowing rate for companies in $ terms has gone up from 8-11% to 16-22%
Average interest rate for ruble bonds are 12 - 18% (for the third tier issues – 22% - 28%)
Eurobonds rates are 9- 20% in $</li></ul>Corporate bonds rates in Russia<br />Source: Central Bank of Russia <br />Source: cbonds.ru<br />7<br />
Government support and growth of loans <br /><ul><li> Government aid package in Russia is about 10% of GDP vs. 5% of GDP in US. </li></ul>% growth of corporate loans<br />% of CBR loans in corporate loan portfolio<br />CBR loans <br />8<br />
Even state banks ask for equity kickers<br />Case-study: Roll-over of Sberbankloan to SibirEnergy<br /><ul><li>SibirEnergy sales in 2008 were $3.5bn.The company is listed on the LSE and ranked 56 among the largest companies of Russia;
Sberbankextended a 3 year $192m loan to the company with a rate of 16.95%;
Equity kicker: 4.03% of shares for $1. The market price of that stake is – $128m plus the additional value of the put option circa$60m;
Expected “Sberbank-Сapital” IRR is 39% (subject to price fluctuations), IRR of the put option is 27%;
Collateral: personal guarantee from property owners; pledge of 23.3% of shares worth $750m.</li></ul>9<br />
Short and long-term investment strategy<br />2009<br />Generate current interest income until repayment <br />Provide secured debt to strong borrowers <br />Credit Opportunity Fund<br />Options and warrants to share upside<br />2009 - 2010<br />Real Estate Opportunity Fund<br />Invest at distressed valuations<br />Generate some current rent income <br />Refinance as cap rates exceed interest rates. Sell at recovered value <br />2010 - 2011<br />2009<br />Help them grow on the empty field <br />Sell at next long-term high market <br />Private Equity Fund <br />“Bottom fishing”<br />Invest in “survivors”<br />10<br />
What is the Credit Opportunity Fund?<br /> Target companies:<br /><ul><li>Mid-sized
Pledge of target companies’ shares, real estate, liquid assets
Personal guarantees of the companies’ owners </li></ul> Target returns:<br /><ul><li>18%+ targeted interest/current return
Equity kickers leading to 30%+ targeted gross return</li></ul>Governing Law:Deal documents – English Law<br /> Collateral of assets in Russia – Russian Law <br />Monitoring and control:Board participation with veto rights<br /> Right to appoint a Financial controller <br /> Regular reports from the company<br /> Control over use of funds<br /> Negative controls covenants <br />11<br />
Begemot – leading toy retail chain. <br />Company description<br /><ul><li>Begemotis a leading toy retailer in Russia, second only to Detskiy Mir in terms of revenue from toys.
Focus on mid-price and low-price segment with retail prices 40% lower on average than in Detskiy Mir.
50 own and 17 franchisee shops in 66 Russian cities.
Key toy supplier for leading retail chains in Russia, such as Magnit, Perekrestok and Sedmoi Continent.
In house developed ERP system allows controlling all sales and stocks daily.
Average mark up is 96%, private label with mark up of 250% which account for 13% of total sales.
EBITDA in 2009 is expected to grow by 37% despite 40% ruble devaluation and resulted slightly reduction of sales in USD.
After new debt, the Debt/EBITDA ratio for the company will still be below 2x.</li></ul>Key financials<br />12<br />
Begemot – leading toy retail chain. <br />Transaction structure <br /><ul><li>Expected IRR: 42-48%. Floor IRR is 30.5% as secured by put option. </li></ul>13<br />