Some interesting articles about collections by Primocollect. You can find information about Ukrainian collection market and debtor portrait.
We just know how !
3. Ewa Zakowicz
Chief Executive Officer
WHO WE ARE
PrimoCollect Group is the leader in Ukrainian debt market specializing in purchase and collec-
tion of debts. The Agency was established in 2006 (Ultimo) with 100% foreign investment and
has been audited for the last 7 years by KPMG and E&Y.
By collecting and organizing data from various portfolios, clients and more than 7 mln cases
during last 8 years we have a solid basis for making a qualified valuation of new portfolios and
realize curves. We just know how!
4. NPL market in Ukraine: good point for investment
Dmytro Lomidze
Collection market regulation in Russia
Alina Glushachenko
Debt portfolios purchase: Ukrainian realities
Andrew Miniv
Portrait of Ukrainian Debtor
Dmytro Lomidze
Reference sample – core of the portfolio valuation
Andrew Miniv
CONTENT
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Our Clients26
2
5. NPL market in Ukraine: good point
for investment
Dmytro Lomidze
Chief Operating Officer
In a classical collection company,
the operating process consists of the
following stages:
Soft (mainly massive calls by
Call-center, using both automatic tools (IVR /
IVM / robotic collector, etc.) and accompany-
ing tools like SMS/messages in social
networks / letters / e-mails, etc.)
Hard (in the classical case mobile/re-
gional groups for direct visits)
Legal (including pre-legal stage)
Enforcement proceedings (execu-
tion/bailiff)
Also, at almost every stage, differ-
ent products can be used:
installment (as with the proposal of
partial write-off and as without it)
write-off of a significant part (usually
for quick repayment of rest of debt within 1-3
months)
repayment (w/o schedule) of the
maximum possible amount of money at the
moment (taking into account clients’ ability to
pay).
All these options can be accompa-
nied by charging fee/ interest in accord-
ance with the initial credit agreement as
well as in accordance with a new agree-
ment with debtor.
Almost every option has pro & contra
and can compete with each other. Best/opti-
mal strategy depends on the specific
features of the country, the complexity of the
portfolio (day past due / level of fee / current
legal stage etc.), the regional factor (concen-
tration), the ability to pay (population), the
level of inflation (economy), the maturity of
the judicial system and the enforcement
system.
So, for example, the classic install-
ment is more profitable (*) than writing off
part of the debt on markets with low inflation.
If the debts have a high regional concentra-
tion – mobile groups also become more
attractive than the work of the Call center.
With the development of the legal system
(protection of the creditor, electronic
3
6. courts, etc.) – the strategy of collection is
logically shifted towards Legal.
Here and below, of course, we are
talking about portfolio segmentation and
homogeneous segments where it is possible
to use several tools or to build a strategy that
contains a combination of stages. For exam-
ple – for some segment of cases it is impossi-
ble to use the Legal tool (lack of documents,
expiry of the period of limitation, etc.) or
impossible to use Call center (absence of
contact phones). In such cases process
reduces to the use of only available tools
(letters and / or mobile group).
(*) In all cases, the arbiter of the optimal
strategy (or change of strategy) is profit.
More precisely, given the characteristics of
emerging markets, the discounted net cash
flow (DCF). The key three factors of this indi-
cator are:
gross efficiency (i.e. what overall
efficiency can the instrument / stage provide)
costs that are required to support
the process
discounting level
The first 2 indicators are the object
of the operational process and in general
can (and should be) managed by the oper-
4
7. ating department. The latter indicator is
external for the company and reflects the
economy of the country.
At the same time, a combination of
factors (for example, significant inflation and
weak legal) can lead (and leads in Ukraine)
to a shift in the optimal strategy to a
short-term strategy, using mainly the Soft
stage.
With 24% discount rate (typical
discount rate in Ukraine) – even with 20%
more efficiency, the Legal process still
remains less profitable compared to the Soft
strategy.
Let's have a look at the current situ-
ation in Ukraine from the point of view of
recovery:
the ability to pay across the popula-
tion is low (given the circumstances of the
last 3-4 years), but there is a significant posi-
tive trend in local currency denominated and
in a minor but positive trend in USD / EUR
denominated
costs (tools, salaries) are also low and
on a positive trend, but the dynam-
ics of growth (both instruments and wages)
are a bit late relative to the previous factor
regional debt concentration allows (at
least partially) to use Mobile Groups for
significant segments of debts
inflation is still significant, and it is a
key factor in choosing the optimal strategy
now, but there is a forecast for further reduc-
tion of inflation, and this factor can change
the situation
the legal system in Ukraine is charac-
terized as weak (significant time limits for
decision-making, weak debt recognition
and loyalty of courts to the creditor), but the
situation is changing for the better, albeit
gradually
the executive system can also be
characterized today as weak (the lack of
interest of state executors to collect small
unsecured debts, significant terms of proce-
dure), but the implementation of the institu-
tion of private executors (from end of 2017)
gives reason to expect a significant
change in the situation in thenearest future
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8. through which you can build a cost-effective
process
gross efficiency of collection will
increase, expenses (direct expense ratio) for
collecting will increase
the efficient collection horizon will be
extended (up to 4-5 years)
In terms of the market, the volume of
the investment in NPL will significantly
increase. Not only due to collateral portfolios
(which is obvious), but also due to an
increase in the average price of selling unse-
cured portfolios. Also, the demand of market
players for long investment will increase,
especially in foreign currency.
So, if the current key trends,
namely:
further reduction of inflation (ac-
cording to forecasts of all financial institu-
tions)
growth of ability to pay in USD /
EUR denominated (according to forecasts of
all financial institutions)
increase in the efficiency of the
enforcement stage of collection (it`s true
looking on early tests; it is also more than
likely, considering the experience of near-by
countries, for example Poland)
continue (it`s exactly according to the fore-
cast), then in the next year or two, a standard
recovery strategy will change. So, the seg-
ment of cases where the executive stage
will be optimal (in terms of DCF as we
said) – will increase. This means that the
Legal stage automatically (preparation and
transfer of cases to the court) will also devel-
op rapidly, even if the efficiency of the judi-
cial system itself does not change (for exam-
ple, the implementation of an electronic
court).
At the same time, this will lead
simultaneously to several significant
changes:
the optimal strategy will shift in the
same segments from short-term strategies of
collection to long
increase the capacity of segments,
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9. ...we are the leader in the region of
190m people that is underestimated
by other market players
10. Collection market regulation in Russia
Alina Glushachenko
Country Manager Russia
Independent collection agencies on
Russian market appeared more than 14 years
ago, in the years 2004-2005 due to the
growth of consumer loans issuing in Banks
and since that time there have been long
debates on their status – legal or illegal,
should be forbidden or strictly regulated etc.
In 2007 NAPCA – National Associa-
tion of Professional Collection Agencies –
was established and it became obvious to
the leaders in collection sphere that there
should be general standards of work,
professional and ethic terms. First ver-
sions of the collection law were written in
this period and had a lot of discussions
and moderations.
Since 2015 the market tries to put
more attention to regulation and correct work
with debtors by all accessible means – as a
standard major Banks determine that compa-
ny should be a NAPCA member, has its own
education department, follow the Ethics
Code of Conduct with the debtors etc.
First attempt to regulate professionals
in collection was made in 2014 – when Feder-
al law “On a customer credit (loan)” was
approved.
In the year 2017 fist specialized law
regulating the rights of individuals while
executing the debt collection appeared. Rus-
sian market lives in new reality already more
than one year.
Now it became possible to estimate
the number of the players and market
volume. There is about 170 Collection Com-
panies in the register and the number is still
growing. In total, about 15 000 people are
currently engaged in this sphere.
Now it is easy to separate Companies
into “white” and “black” collectors.
The law determined the entry barri-
er – the number of active players de-
creased. The requirements to the activity
became tougher – administrative costs are
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11. higher, contactability and as a result the
revenue became lower. At the same time
the hard claims from the debtors
decreased.
Collection market has its regulator –
Federal Service of Bailiffs – the professional
community started constructive dialog with
the regulator. In 2018 the regulator started
first planned checks of the Collection Com-
panies from the register, simultaneously,
developing the standards and requirements
for such checks. The paradox of the situation
is that we have regulator, but regulator can
control and correct the activity only of “white”
collectors from the register – but no actions
towards illegal companies are taken.
Collection business is a very impor-
tant and serious part of the macro eco-
nomics. Collection companies in common
return to economics more than 60 bln RUR
per year, make payments to taxes and
budget – more than 3,5 bln RUR per year.
For now, it is a great step that collec-
tion activity and society is no longer under
uncertainty, the image of the professional
collector has been approved, social pressure
has decreased (comparing to the previous
period). Otherwise, there are a lot of gaps
and no balance between the creditor and
debtor interests – it covers mostly the debt-
or’s interests and rights.
Professional society expects to
start negotiations on the changes to the
law and works a lot on proposals. This
year Federal Service of Bailiffs organized
first Round tables with collection commu-
nity on the first results of the Law imple-
mentations, problems and trends. This
activity is expected to be held once or
twice per year, with further changes and
developments of the most important
issues.
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12. ...we are the most experienced and
proven debt collection team in CIS
13. Debt portfolios purchase: Ukrainian
realities
Andrew Miniv
Chief Risk Officer
Debt purchase (DP) market overview
PrimoCollect Group has been consist-
ently acquiring NPL and PL portfolios from
different asset classes (consumer unsecured
loans, car loans and Tails, SME/Corporate
loans, debts for different types of services),
but our core specialization is mass individual
unsecured NPLs. PrimoCollect was a pioneer
on Ukrainian Debt Purchase market – we
closed the first deal on the market in
mid-2008. Since 2012 we became undisputa-
ble leader on Ukrainian unsecured DP market
and continue keeping the biggest share of
the market volume.
Up to the March 2018, the Group
assessed ~900 portfolios, acquired 369 NPL
portfolios from 80 Vendors, amounting ~1.9
m cases in value of 24 bnUAH,having as
main source banking and non-banking finan-
cial products. We possess the biggest unse-
cured NPL database in Ukraine.
The following two diagrams present
Ukrainian Debt Purchase dynamic by seg-
ments: our core unsecured segments Banks,
GDF (Guaranty Deposit Fund – government
organization that manages most part of toxic
Banks assets) and MFO (Micro-Finance
Organizations) and Other that contains debts
for different services (utilities, telecommuni-
cations, cable-TV, Internet, etc) and secured
NPLs. Information was taken from open and
private tenders where we took part.
Diagram 1. UA DP Market split by
segments, portfolios/tenders
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14. Diagram 2. UA Debt Purchase Market
split by segments, Face Value in bnUAH
that allowed to balance market price and
GDF price expectations (that were too high
previously). We expect that next year GDF
will sell even bigger volumes (bnUAH ~20)
and NBU (National Bank of Ukraine) will also
start selling its NPL portfolios. MFO has been
growing since 2015. So, we expect even
higher unsecured DP volume in 2018.
Preparation to NLP sale
NPL portfolios salepurchase can be
arranged using one of the two following
agreement types:
Cession Agreement (clauses 512,
513, 656, Civil Code of Ukraine). According
to this agreement, primary Lender transfers
(retrieves) to New Lender collection right,
emerged from credit or pledge agreements.
Factoring Agreement (paragraph 73,
Civil Code of Ukraine): one Party (Factor) at
some price (in any way, foreseen by agree-
ment) transfers or commits himself to transfer
money to another Party (Client), and Client
retrieves to Factor collection right from third
parties(debtors). Factor’s remuneration can
be in a form of discount or a separate com-
mission, which, in practice, is negligible.
There is also an additional subdivi-
sion of Sale/Purchase Agreements:
Spot-sale, which foresees single
portfolio sale. At first, Buyer analyses a port-
folio, estimates price and conditions and only
then signs an agreement and processes sale.
Taking into account PrimoCollect is the
biggest Buyer on unsecured DP market, our
knowledge about 3 core segments repre-
sents >90% of the whole UA market.
Taking into account PrimoCollect is the
biggest Buyer on unsecured DP market, our
knowledge about 3 core segments repre-
sents >90% of the whole UA market.
One can see, that despite 2014 politi-
cal and economic crisis in Ukraine, market
stayed quite stable during 2013-2016. Further-
more, last year was the most productive in
NPL sales, in all core segments. Since the end
of 2016 one of key Debt Purchase Vendors
became GDF (Guaranty Deposit Fund) due
to the fact that GDF finally ran Holland
Auctions, where portfolio’s price discount
was gradually growing from 0% to >99%,
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15. Each Company that is going to sell its debts
should be ready to pass the following stages:
Forward-Flow Agreement. One agreement foresees conditions of
further portfolios’ periodical sale during the period, regulated by agree-
ment, in which should be mentioned all characteristics of further portfo-
lios such as price, agreement expiration date, sales periodicity and
maximal allowed amount of sale. Seller should sell to the Buyer portfoli-
os with determined characteristics, and Buyer should purchase spe-
cific amount mentioned in the agreement by established price.
Depending on NPL market maturity, political, legal and invest-
ment climate in the country, Banks and other financial organizations
prefer different solutions for their NPL portfolio management. The
following graph presents where different countries’ NPL markets are
situated on general progress vertical line.
13
16. Each Buyer’s NPL portfolio valuation process
differs from other processes by specific
approaches and methods; however, common
phases are always present:
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17. ...we have demonstrated that we can
capitalize on our strengths and deliver
strong financial performance
18. Portrait of Ukrainian Debtor
Dmytro Lomidze
Chief Operating Officer
PrimoCollect company has been
operating in the Ukrainian market for more
than 12 years and during this time, the com-
pany processed more than 4 million debtors -
individuals. Of these, over 2 million individu-
als we know from own portfolios. According
to company estimates, at least 40% of all
Ukrainian debtors passed through the com-
pany during this time. Thus, with this relevant
knowledge, we can give some statistical
parameters characterizing the market of
debtors. Such indicators are specific
features of Ukrainian market (difference in
the economic and social structure of the
regions), as well as and as interesting data to
have a closer look at.
So, what is the level of penetration?
(that is, the correlation of debtors who were
transferred / sold to collection companies to
the entire population of the region). In gener-
al, in Ukraine this figure is about 7%.
So, the inhomogeneity of this indicator is
obvious. Look at the developed industrial
regions – in the East of Ukraine. Such as
Donetsk, Dnepropetrovsk, Lugansk, Kharkov.
At the same time, it is also distinguished by a
high level of penetration – the capital of
Ukraine (Kiev). On the contrary, the western
regions are characterized by a relatively low
level of penetration. The same low figure is in
the Crimea.
Let's see how much the level of prob-
lem loans relative to the population corre-
lates with the level of fraud (as a sign of
fraud, we will understand the absence of
16
19. payments within 2 years or more after the
appearance of delay).
Let's see how much the level of NPL
relative to the population correlates with the
level of fraud (as a sign of fraud, we will
understand the absence of payments within 2
years or more after the appearance of delay
payments).
The situation in general is the oppo-
site. With an average level of 35%, the west-
ern and southern regions are characterized
by a higher level of fraud. Up to 40% in Volyn,
Zakarpattia, Chernivtsi and Odessa regions.
At the same time, the northern and eastern
regions have comparably low level. The
lowest level was historically observed in the
Luhansk region – less than 30%. Let's note,
of course, that the data for zones of ATO and
Crimea were taken only until 2015, for obvi-
ous reasons, which can somewhat distort the
fair comparison.
The average loan (ticket size) in
Ukraine in national currency has been grow-
ing for the last 5-6 years, but in dollars it is
still quite low – that is, less than $ 500 ($ 417
over the past 5 years). Of course, we are
talking about retail unsecured loans. 2
regions with the largest average ticket size:
Kiev and L’viv (2 of the country's capital –
administrative and cultural one).
Further logically followed by industrial
regions with a high level of average salary:
Dneproterovsk, Donetsk and Lugansk.average
salary: Dneproterovsk, Donetsk and Lugansk.
Let's look at the signs of the zodiac. For
many years people are divided into 2 catego-
ries, some believe in the importance of this
factor, the latter consider it pseudoscientific.
We just show that, at least in Ukraine, the stars
influence in one way or another the desire to
take a loan.
17
20. In this case, we did this research in 2013. And thus, neither
leaders: Aries and Cancer, nor outsiders – Scorpio and Sagittarius, have
not changed!
Let's see how the stars affect the size of the loan and the ability
to repay debt:
We have good news for supporters of the unscientific nature
of the zodiac: The intention to settle the debt and the level of fraud
is completely independent of the sign of the zodiac.
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21. However, for lovers of astrology, there
is also good news. At least in Ukraine –
Aries take significantly larger loans. You can
argue, this is due to scoring systems in the
bank, or features of the character of Aries,
but the fact remains the same.
Also, at the end let's look at the
distri-bution of debtors by age. It is interest-
ing to look at the age when taking a loan
and the age when making a payment in a
collection company.
As we see, loans (mainly in
2006-2009) were taken mostly by young
people. The leader is a group of 23-27 years
old. Looking on payments, on avrage, we see
roughly the same distribution but with a shift
of 2-2.5 years.
This is logical taking into accounts the
average days past due (about 900 days).
We also see that pensioners (60+) are espe-
cial responsible for solving financial prob-
lems.
Finally, we'll look at the almost
complete gender parity in the debtor base
in Ukraine:
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22. ...we are known for our high ethical
standards and transparent dealings
23. Reference sample – core of the
portfolio valuation
Andrew Miniv
Chief Risk Officer
Reference selection principles
The most sophisticated valuation
methodology and powerful statistical model-
ling software will not help you to valuate NPL
portfolio without proper reference database.
Reference samples deliver us key correla-
tions that allow to forecast cash-flow of
assessed portfolio. Reference history analy-
sis and back tests allow us to define existing
valuation methodology bottle-necks and
improve it. Reference knowledge and experi-
ence helps to understand its quality in each
specific case, chose proper valuation statisti-
cal instruments and methods, identify VAR
level for each investment project.
From the very beginning, before refer-
ence database processing, we should gather
and analyze all available information about
portfolio that should be valuated, its Vendor,
Product (type of loan, service, etc) and Ven-
dor’s typical Client/Debtor:
Descriptive statistics – in-depth
analysis of valuated portfolio register
Additional tender information – tender
documentation, Q&A series with Vendor
Previous cooperation with Vendor –
prior purchased portfolios, outsourcing debt
collection cooperation
General information available on the
market about Vendor, its portfolio and Prod-
uct (services)
External PrimoCollect managers’
experience – previous work experience of
cooperation with the Vendor or other similar
companies.
After this in-depth analysis stage, we
have complete and clear picture of valuated
portfolio/Vendor and are ready to search for
best-fitting reference sample. Very often
valuated portfolio is so heterogeneous (PL
and NPL, different Products, very wide distri-
bution by key characteristics) that it should
be divided into several homogeneous clus-
ters (each one should be valuated separate-
ly). The following scheme represents stand-
ard algorithm of Reference sampling:
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25. Reference sample could be sepa-
rate portfolio, group of similar portfolios,
homogenous selection from one or several
portfolios. Everything depends on stability
of valuation and reference populations.
There are some consistencies and
priorities in presented Algorithm1, but our
rich practical experience on debt purchase
market in different countries showed us that
sometimes these rules should be broken. For
example, there might be situation when it is
better to take reference from different Vendor
in another Country, but with very similar pop-
ulation (cases distribution by key character-
istics), than reference from the same Vendor,
but with completely different distribution.
Reference selection impact on valuation
accuracy.
One can see on Scheme1 that Cluster
C has 1 reference, but Cluster A has 5 refer-
ences. Cluster might have several referenc-
es, when in reference database we have
absolutely homogeneous cases (by all key
characteristics) that were purchased in
different time from different Vendors (sepa-
rate portfolios), and these sub-clusters gen-
erate different cash-flow level (different
performance). This difference is caused by
hidden/unknown parameters of the portfolio
that are not represented in portfolio register
or any other information presented during
tender/valuation. In Vendor name and date of
portfolio sale (these two factors are actually
portfolio identification) might be encoded
several important and very strong character-
istics that differ between portfolios:
Typical Client/Debtor portrait
Vendor acceptance and verifica-
tions policy
Level of in-house payments monitor-
ing and debts collection
Portfolio preparation for sale and level
of pre-selection.
Let’s imagine that during last year
there were sold 100 portfolios by different
Vendors, but all cases (debts) are from one
very narrow cluster (like, DPD 90-120 days,
debts USD 300-400, etc.). One can see on
the Diagram1 that most part of portfolios are
close to the middle of presented distribution,
that means they perform close to average
market level (have 0% performance deviation
from average level). Let’s assume that last
year we just entered this market and
purchased only one portfolio:
Diagram 1. Portfolio distribution
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26. impressive results in this area. We are buying
portfolios in 3 countries, we have assessed
more than 1 300 portfolios, purchased almost
500 portfolios from 120 different Vendors, we
have above 5m unique debtors in our data-
base, 3m debtors’ payments and more than
220m effective collection actions that form
behavioral characteristics DB for our future
valuations. We possess the biggest unse-
cured NPL database in Ukraine.
Discussing reference sufficiency
issue, we are using term “reference map
coverage”. We say that we have 100% (com-
plete) reference map coverage in some seg-
ment, if for any portfolio available for sale on
the market we have enough reference cases
from the same cluster and these cases were
purchased from different Vendors (different
portfolios). For easier understanding the
Diagram2 represents current PrimoCollect
UA reference map coverage by regions (cer-
tain color represents the number of purchase
cases in a region, circle area and number in
it – number of purchased portfolios):
As one can see we have complete
reference map coverage by regional struc-
ture in Ukraine – we have more than 52 thou-
sand cases in every district (more than
enough for statistical modelling) from in aver-
age 200 portfolios, that gives us perfect
knowledge about significance of forecasted
results and confidence intervals.
Portfolio B – we had a luck to
purchase representative of average market
level. If we use it as reference for valuation of
this cluster in the next year and buy a lot of
portfolios, they will perform exactly at fore-
casted level
Portfolio C – this portfolio is 30%
better than average. From the beginning
everything is great – we earn more than we
expected. But it is a dangerous situation – all
next portfolios that will be purchased using
this portfolio as a reference will be over-as-
sessed and will underperform our forecast (in
average on 30%)
Portfolio A – probably the worst
situation, this portfolio is 60% worse than
average. It will form for us very conservative
vision of the market. Our prices for next port-
folios will be very low, competitors will always
offer higher prices.
This illustration shows how crucial is
forming reference database for successful
debt purchase business. Every time entering
new market or starting new segment, the key
efforts and primary strategy should be aimed
not at fast achievement of defined market
share or target IRR, but at fast forming suffi-
cient reference database with minimal poten-
tial losses. This will allow following fast busi-
ness expansion with predictable and guaran-
teed IRR. PrimoCollect Group has achieved
24
27. Similar map might be drawn for each
important characteristic (debt amount, prod-
uct, DPD, etc.) with its borders and regions
(segments, clusters). Such map should not
have gaps, otherwise your valuation results
will not be reliable. It is extremely important
task of Valuation team to control reference
map coverage, guide Group’s Management
Board in finding optimal balance between
risky investments in reference map expan-
sion and core profitable investments in
known clusters, in order to satisfy investors’
financial expectations and ensure future
growth.
Diagram2. UA reference map
coverage – regional structure
25
29. ...in Ukraine
...in Russia
We are among Top 10 collection companies in Russia
We were among first collection companies who received license in Federal register in Russia
We cooperate with more than 80 clients in Russia
We have relations with more than 400 potential Clients
We expect growth of ODC and PD market
We are the top collection company in Ukraine
We were the first collection company who closed the first deal in PD in Ukrainian Market and now
absolute dominant leader with 72% share in this direction
We cooperate with more than 100 clients in Ukraine
We have relations with more than 150 potential Clients
We are the Partner for DGF in ODC and PD
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