ACRA CONFIRMED COMPLIANCE OF DOM.RF MORTGAGE AGENT LLC'S EXCHANGE-TRADED BOND ISSUE WITH SUSTAINABLE DEVELOPMENT BOND STANDARDS

ACRA HAS CONFIRMED THE COMPLIANCE OF THE ISSUE OF EXCHANGE-TRADED BONDS OF DOM.RF MORTGAGE AGENT LLC AND THE PROJECT REFINANCED USING THE PROCEEDS FROM THE BOND PLACEMENT WITH THE INTERNATIONALLY RECOGNIZED SOCIAL AND GREEN FINANCE PRINCIPLES AND STANDARDS (GREEN AND SOCIAL BOND PRINCIPLES¹ OF THE ICMA²) AND CONFIRMED THE COMPLIANCE OF THE ISSUE OF EXCHANGE-TRADED BONDS OF DOM.RF MORTGAGE AGENT LLC WITH THE SUSTAINABLE DEVELOPMENT BOND STANDARDS AND VERIFIED THE REPORT ON THE USE OF PROCEEDS FROM THE PLACEMENT OF SUSTAINABLE DEVELOPMENT BONDS

COMPLIANCE OF THE ISSUE WITH REGULATION OF THE BANK OF RUSSIA NO. 706-P DATED DECEMBER 19, 2019

As part of the series BO-001P-37 (ISIN RU000A106YR5) bond issue of DOM.RF Mortgage Agent LLC (hereinafter, the Issuer) ACRA verified the compliance of the bond issue, as well as the Project refinanced using the proceeds from the bond placement, with the internationally recognized goals, principles, standards, and criteria in the field of ecology and green finance (ICMA Green Bond Principles (GBP), 2021 GBP)³ and the internationally recognized goals, principles, standards and criteria in the field of social finance (ICMA Social Bond Principles (SBP), 2023 SBP).

The projects presented by the Issuer (see below) fall into the following ICMA project categories:

• Energy efficiency⁴;

• Affordable housing⁵.

Refinancing of similar projects by issuing sustainable development bonds is allowed in international practice.

The project was defined as a mortgage-backed bond issue⁶, which is entirely formed from mortgages certifying mortgage loans corresponding to the categories of permissible social projects of the 2023 SBP and/or categories of permissible green projects of the 2021 GBP (previously and hereinafter referred to as the Project). Mortgages certifying mortgage loans that meet the 2021 GBP eligible green project categories also meet the criteria of the Green Project Taxonomy⁷. No new mortgage certificates were included in the in the mortgage coverage of the bond issue after the Issue Decision⁸ was signed.

The proceeds from the analyzed issue were used to refinance a portfolio of mortgages representing mortgage loans included in the mortgage coverage of the bond issue and issued in accordance with the criteria specified in the Issue Decision and Table 1 of this press release (hereinafter, the Criteria).

The nominal volume of the issue in monetary terms was RUB 29,839,165,000 as of bond placement date. The issuer confirmed to the Agency that the volume of the bond issue does not exceed the total amount of financial resources previously provided to finance the portfolio of mortgages certifying mortgage loans included in the mortgage coverage of the bond issue and issued in accordance with the Criteria.

The use of apartments that are the subject of mortgages under certified mortgage loans as part of mortgage coverage with a total area of 683,000 square meters, that meet the social criteria specified in Table 1, allows a positive effect to be achieved in terms of social impact, which is expressed in the following:

• Improvement of living conditions for 11,869 households (26,304 people, including borrowers and members of their families, have improved their living conditions, including 10,524 minors (children).

The use of apartments that are the subject of mortgages under certified mortgage loans as part of mortgage coverage, in buildings with energy efficiency classes A, A+, and A++ with a total area of 37,700 square meters, corresponding to the specified green criterion, allows positive effects to be achieved in terms of environmental impact, which are expressed as follows (see the Key Assumptions section):

• Reduction of annual consumption of heat compared to the base level (energy efficiency class D) — by 3,639,488.9 kWh.

• Reduction of annual consumption of electricity for general apartment building needs compared to the base level (energy efficiency class D) — by 150,650.8 kWh.

• Reduction of annual greenhouse gas emissions from the generation of heat compared to the base level (energy efficiency class D) — by 842.2 tons of CO₂.

• Reduction of annual greenhouse gas emissions from the generation of electricity compared to the base level (energy efficiency class D) — by 52.4 tons of CO₂.

Detailed information about the methods for determining the environmental and social effects is provided in the Key Assumptions section.

ACRA confirms that the bond issue (ISIN RU000A106YR5) and the Project refinanced using the proceeds from the sustainable development bond issue comply with all of the ICMA’s basic internationally recognized principles and standards in the field of ecology and green finance as amended in 2023 (2023 SBP) and the ICMA’s internationally recognized principles and standards in the field of ecology and green finance as amended in 2021 (2021 GBP).

¹ The project is recognized as green only in terms of refinancing mortgage loans that meet the categories of eligible green projects of the 2021 GBP.
² International Capital Market Association
³ The project is recognized as green only in terms of refinancing mortgage loans that meet the categories of eligible green projects of 2021 GBP.
⁴ See the ICMA’s Green Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/
⁵ See the ICMA’s Social Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/social-bond-principles-sbp/
⁶  As of the date of signing the Issue Decision.
⁷ Decree of the Government of the Russian Federation No. 1587 dated September 21, 2021 “On approval of the criteria for sustainable (including green) development projects in the Russian Federation and requirements for the system for verifying sustainable (including green) development in the Russian Federation.”
⁸ The decision on the issue of securities under the exchange-traded bond program, which secures a set of property and non-property rights in relation to the issue of bonds (registration number 4B02-36-00307-R-001P dated September 26, 2023, ISIN RU000A106YR5).

COMPLIANCE OF THE ISSUE WITH THE ICMA’S GREEN AND SOCIAL BOND PRINCIPLES

ACRA confirms that the Issuer’s analyzed bond issue complies with all the basic components of the 2021 GBP and 2023 SPB simultaneously. The area in which proceeds will be used (Project that is refinanced through the issue of bonds to achieve objectives that comply with ICMA project categories and has positive environmental and social effects), process of evaluating and selecting projects, and management of proceeds and reporting presented in the Mortgage-backed Green Bond Concept of DOM.RF Mortgage Agent LLC⁹ (hereinafter, the Green Bond Concept) and the Mortgage-backed Social Bond Concept of DOM.RF Mortgage Agent LLC¹⁰ (hereinafter, the Social Bond Concept) are fully in line with 2021 GBP and 2023 SPB criteria, and consequently the analyzed bond issue can be considered as a sustainable development issue.

⁹ https://xn--90an6b.xn--d1aqf.xn--p1ai/upload/iblock/38a/wwaq5j4lii6k0fccx5rxkutkoaa7tu0c.pdf
¹⁰ https://xn--90an6b.xn--d1aqf.xn--p1ai/upload/iblock/714/d4iv33o6l4w5il29qw2yv1ie7jtatqxk.pdf

KEY ISSUE PROPERTIES

Sources: ACRA, Issuer’s data

The Issuer is the unified development institution in the housing sector as per Federal Law No. 225-FZ dated July 13, 2015 “On promoting the development and increasing the efficiency of management in the housing sector and on introducing amendments to certain legislative acts of the Russian Federation” and promotes the development of residential mortgage lending and the mortgage-backed securities market. The exclusive subject of the Issuer’s activity is the refinancing of loans secured by collateral (mortgages) through their securitization — issuing bonds with mortgage backing and guarantees of DOM.RF JSC (hereinafter, DOM.RF MBS).

In order to issue green and social bonds, the Issuer has developed and implemented the:

o   Green Bond Concept;

o   Social Bond Concept.

The Issuer’s sustainable development activities are regulated by the Sustainable Development Policy (hereinafter, the Policy), adopted at the level of a single participant, which defines the principles and areas of activities in the field of sustainable development. Further information about the Issuer’s sustainable development activities is provided in the Agency’s press release dated September 27, 2023¹¹.

¹¹ Press release dated September 27, 2023: https://www.acra-ratings.ru/press-releases/4237/?lang=en

KEY ASSESSMENT FACTORS

The Issuer provided ACRA with documents containing the eligibility criteria for mortgage loans included in the issue of sustainable development bonds, a description of the process for selecting these mortgage loans, approaches to managing proceeds and preparing reporting, as well as the Report on the Use of Bond Issue Proceeds. ACRA drew conclusions on the compliance of the bond issue with the four components of the 2021 GBP and 2023 SPB based on these documents.

Use of proceeds

The objectives of the issuance of the Issuer’s bonds are formulated in the Issue Decision and comply with the 2021 GBP and 2023 SPB.

For the issue of MBS, DOM.RF acquired from financial organizations, including banks, a portfolio of mortgages that meet the Criteria, at the expense of which financial organizations (banks) refinance mortgage loans.

Mortgage coverage of the MBS of DOM.RF is formed only from mortgages secured by collateral (mortgage) of residential real estate.

Using proceeds received from the analyzed issue, the Issuer refinanced mortgage loans that met the Criteria.

The mortgage coverage of the bond issue as of the date of signing the Issue Decision included 11,869 mortgages certifying the rights of claim to monetary obligations secured by mortgages in the amount of the principal balance of RUB 29,839,165,584.07. The mortgage coverage does not include loans issued more than 13 years ago from the date of signing the Issue Decision, with the earliest loan issued in September 2010.

Table 1. Mortgage coverage structure¹²

¹² As of the date of signing the Issue Decision.
¹³ There may be one or more criteria for a single mortgage loan.
Sources: ACRA, Issuer’s data

All mortgages included in the mortgage coverage are social in accordance with the specified social criteria. An additional 7.1% of mortgages (share of loan balance) are also green according to the green criterion.

The Issuer confirms that as per the Issue Decision, all of the proceeds from the analyzed sustainable bond issue were used solely to refinance the abovementioned mortgage loans, which can be included in the following ICMA project categories as per the 2021 GBP and 2023 SBP:

• Energy efficiency (green projects);

• Affordable housing (social projects).

In addition to the previously submitted materials as part of the verification of the Report on the Use of Bond Issue Proceeds, the Issuer provided the Agency with the:

(1)    Report on the Use of Bond Issue Proceeds;

(2)    Report for investors of “DOM.RF Mortgage Agent” LLC.

According to information provided by the Issuer, 100% of the mortgage loans were issued for the purchase of apartments in already built apartment buildings. At the date of verification, apartment buildings had been put into operation after receiving the appropriate permits, including those regarding the requirements of environmental legislation.

The positive environmental and social effects from the implementation of the analyzed projects by the Issuer are presented on pages 2–3 of this press release.

ACRA considers the calculations and key assumptions made by the Issuer to calculate the expected environmental and social effects to be acceptable.

Project evaluation and selection procedure

The Issuer has defined a number of procedures that regulate the process of evaluation and selection of refinanced mortgage loans and are set out in the Recommended Parameters of Mortgages included in the Mortgage Coverage of Bond Issues with Mortgage Coverage and Guarantees of DOM.RF JSC¹⁴, Green Bond Concept and the Social Bond Concept. In the Agency’s opinion, these procedures comply with the 2021 GBP and 2023 SBP.

Detailed information on the process of assessing and selecting refinanced mortgage loans is presented in the Agency’s press release dated September 27, 2023¹⁵. In ACRA’s opinion, the described algorithm evidences that the project evaluation and selection procedure is effective.

Management of proceeds

The procedure for managing the proceeds from the analyzed issue of bonds is set out in the Green Bond Concept and the Social Bond Concept, as well as in the Bond Issue Decision.

As of the date of signing the Issue Decision, the mortgage pool was fully formed. All the apartments in the mortgage pool are located in ready-built residential buildings. No new mortgages were included in the mortgage pool after the date of the Issue Decision.

Detailed information on the management of proceeds from the analyzed bond issue is presented in the Agency’s press release dated September 27, 2023¹⁶. In ACRA’s opinion, the procedure for managing the bond issue proceeds generally complies with the 2021 GBP and 2023 SBP.

Reporting

The Issuer is obliged to prepare annual reports on the use of bond issue proceeds, starting from the year of the beginning of bond issuance and ending with the year when the proceeds are used in full to refinance the Project. The Issuer is also obliged to engage a third-party verifier to conduct an independent external assessment of these reports.

The report on the use of bond issue proceeds for 12 months of 2023 is disclosed at http://www.e-disclosure.ru/portal/company.aspx?id=36731.

The Issuer disclosed this report on time and in full¹⁷.

The report on the use of bond issue proceeds includes the following information required to be disclosed by the Issuer of sustainable bonds:

• Project brief (subject to confidentiality requirements);

• Approved amount of financing of the Project using bonds;

• Share of project financing covered using other sources;

• Allocation of bond issue proceeds;

• Allocation of bond issue proceeds in the reporting period;

• Management of unallocated proceeds;

• Progress in qualitative and quantitative goals of the Project, as specified in the Bond Issue Decision, including:

o   Improvement of living conditions for 11,869 households (26,304 people, including borrowers and members of their families, have improved their living conditions, including 10,524 minors (children);

o   Reduction of annual heat energy consumption for heating, ventilation and hot water supply, and the associated reduction in greenhouse gas emissions (СО₂ equivalent) (energy efficiency class D) — by 3,639,488.9 kWh);

o   Reduction of annual electric energy consumption for general apartment building needs and the associated reduction in greenhouse gas emissions (СО₂ equivalent) (energy efficiency class D) — by 150,650.8 kWh;

o   Annual reduction in greenhouse gas emissions (СО₂ equivalent) from heat energy generation due to lower consumption of heat energy, tons of СО₂ equivalent (energy efficiency class D) — by 842.2 tons of CO₂;

o   Annual reduction in greenhouse gas emissions (СО₂ equivalent) from electric energy generation due to lower consumption of electric energy, tons of СО₂ equivalent (energy efficiency class D) — by 52.4 tons of CO₂,

• Confirmation of the implementation of the Project described in the Bond Issue Decision (program) listed in the Segments of the Sustainable Development Sector of Moscow Exchange and actual use of bond issue proceeds;

• Information on the progress of the Project as of the end of the reporting period.

ACRA considers the information included in the Report on the Use of Bond Issue Proceeds for 12 months of 2023 to be sufficient and reliable. In the Agency’s opinion, the report fully complies with the 2021 GBP and 2023 SBP, as well as the Green Project Taxonomy.

¹⁴ https://ицб.дом.рф/upload/documents/rekomenduemye-parametry-zakladnyh.pdf
¹⁵ Press release dated September 27, 2023: https://www.acra-ratings.ru/press-releases/4237/?lang=en
¹⁶ Press release dated September 27, 2023: https://www.acra-ratings.ru/press-releases/4237/?lang=en
¹⁷ https://www.e-disclosure.ru/portal/files.aspx?id=36731&type=8

Additional assessment factors

Organizational structure and strategy

The Issuer does not have a staff of employees, and DOM.RF Asset Management LLC acts as its sole executive body.

The Issuer’s sustainable development activities are regulated by the Policy.

The Issuer engaged external advisors, Bank GPB (JSC) and DOM.RF JSC, to calculate environmental and social effects, which is positively assessed by the Agency.

ACRA highly assesses the degree of integration of the sustainable development principles into the Issuer’s policies and procedures, as well as the overall quality of corporate governance and strategic planning of the Issuer, taking into account its policies and procedures.

Financial feasibility of the project

Since the bond issue proceeds have been used to refinance the Project, and on the verification date, relevant apartment blocks were put into operation, there are no additional risks for the Project.

key assumptions

• Targeted use of the sustainable development bond issue proceeds.

key assumptions for calculating environmental and social effects

1.      For social effects. The expected social effect is calculated on the basis of actual data on the number of borrowers, minors (children of borrowers), and the total number of family members of borrowers of loans that meet the criteria specified in the Social Bond Framework. Actual data on the total area of apartments, their number and the average household size in Russia according to the population census of 2020–2021 were also used to calculate the average housing area.

2.      For environmental effects. The expected environmental effect is characterized by green residential apartment buildings of energy efficiency classes A, A+, A++¹⁸, which ensures reduced energy consumption compared to buildings with a basic energy efficiency class D, as well as reduces indirect energy emissions of greenhouse gasses associated with the generation of consumed energy resources.

For the quantitative estimation of the environmental effect, the following indicators were selected:

• Reduction of annual heat energy consumption for heating, ventilation, hot water supply in green residential apartment buildings compared to the basic energy efficiency class D, kWh or Gcal;

• Reduction of annual electric energy consumption for general house needs in green residential apartment buildings compared to the basic energy efficiency class D, kWh

• Annual reduction in greenhouse gas emissions (CO₂ equivalent) from heat energy generation by reducing the consumption of heat energy in green residential apartment buildings compared to the basic energy efficiency class D, tons of CO₂ equivalent;

• Reduction of annual GHG emissions (CO₂ equivalent) from electric energy generation by reducing the consumption of electric energy in green residential apartment buildings compared to the basic energy efficiency class D, tons of CO₂ equivalent.

The greenhouse gas emission factor from heat energy generation was estimated using the regional method in accordance with the approaches set out in the Methodological Guidelines for Quantifying the Volume of Indirect Energy Emissions of Greenhouse Gasses approved by Order of the Ministry of Natural Resources and Ecology of the Russian Federation dated June 29, 2017 No. 330. The greenhouse gas emission factor from electricity generation was determined using data from ATS JSC (the Trading System Administrator).

For the purposes of quantitative assessment, based on conservative assumptions, it was assumed that all green buildings have energy efficiency class A, which ensures a reduction in energy consumption by 40% compared to the basic energy efficiency class D.

The calculations of the environmental effect take into account the reduction of greenhouse gas emissions only from the generation of energy resources consumed by residential buildings. The calculations do not include the reduction of emissions from the full life cycle of energy resources (extraction, transportation and processing of energy resources, design, construction, operation and dismantling of generation facilities, etc.).

¹⁸ In accordance with Order of the Ministry of Construction and Utilities of the Russian Federation dated June 6, 2016 No. 399/pr “On approval of the Rules for determination of energy efficiency class of apartment blocks”.

assessment components

Compliance of the issue with the 2021 GBP/2023 SBP: yes.

Assessment score: SDR1.

APPENDIX 1. COMPLIANCE OF THE PROJECT REFINANCED USING THE PROCEEDS FROM THE BOND ISSUE WITH THE REQUIREMENTS OF RESOLUTION OF THE GOVERNMENT OF THE RUSSIAN FEDERATION NO. 1587 DATED SEPTEMBER 21, 2021 “ON APPROVAL OF THE CRITERIA FOR SUSTAINABLE (INCLUDING GREEN) DEVELOPMENT PROJECTS IN THE RUSSIAN FEDERATION AND REQUIREMENTS FOR THE SYSTEM FOR VERIFYING SUSTAINABLE DEVELOPMENT FINANCE INSTRUMENTS IN THE RUSSIAN FEDERATION”

ACRA has also verified the compliance of the Project refinanced using the proceeds from the analyzed bond issue with the criteria set by Resolution of the Government of the Russian Federation No. 1587 dated September 21, 2021 with regard to green projects (the Green Project Taxonomy).

Verification methodology

Mortgage loans refinanced using the proceeds from the bond issue were assessed using the Methodology for Green Debt Obligation Assessment with regard to green bonds.

Activities performed

Documents and other information presented by the Issuer were reviewed by the Agency for compliance with the abovementioned criteria, as well as for correctness and reliability.

In addition to the documents previously presented for the purposes of verification, the Issuer provided the Agency with:

(1)    Bond Issue Decision;

(2)    Report on the use of bond issue proceeds;

(3)    Report for investors of DOM.RF Mortgage Agent LLC;

(4)    Additional materials provided at the Agency’s request.

A number of interviews were held with the Issuer.

Confirmation of independence of judgment and absence of conflicts of interest or other circumstances that impede proper, objective and impartial analysis and judgment:

See page 11 of this press release.

Is the Originator liable for non-compliance of the sustainable development financial instrument with the requirements?

If the bonds are included in the Sustainable Development Sector of Moscow Exchange, the withdrawal of the abovementioned conclusion may result in the removal of the bonds from this sector.

Compliance of the sustainable development project with one or more areas stipulated by the criteria for sustainable development projects:

• 3.5 Mortgage lending to individuals.

Information about the Initiator and the sustainable development projects:

The Initiator is DOM.RF Mortgage Agent LLC. The sole purpose of the Initiator is refinancing mortgage loans, namely, mortgage-backed bonds guaranteed by JSC DOM.RF (DOM.RF’s MBS), by way of securitization.

Areas and goals of refinancing the selected portfolio of green projects

Area: Construction.

Goal 1: reduction of СО₂ emissions.

Goal 2: energy saving and higher resource consumption efficiency.

Assessment of the compliance of the financed sustainable development project with the criteria for sustainable development projects:

Complies (see pages 2–4 of this press release).

Analysis of the purposes for which the proceeds are used and the procedures for providing recommendations on the use and management of proceeds:

Complies (see pages 5–8 of this press release).

Analysis of procedures for selection and approval of sustainable development projects:

Complies (see pages 5–6 of this press release).

Analysis of control over the implementation of sustainable development projects:

Complies (see page 6–7 of this press release).

Value of indicators and independent confirmation of the expected environmental effect from the implementation of the sustainable development project¹⁹:

The expected environmental effect from the use of mortgaged apartments in residential buildings of energy efficiency classes A, A+, A++ with the total area of 37,700 sq. meters is expressed in the following:

• Annual reduction in heat energy consumption by 3,639,488.9 kWh;

• Annual reduction in electric energy consumption for general house needs by 150,650.8 kWh;

• Annual reduction of СО₂ emissions from heat energy generation by 842.2 tons of СО₂;

• Annual reduction of СО₂ emissions from electric energy generation by 52.4 tons of СО₂;

• Reduction of energy consumption and СО₂ emissions under the project scenario against the base scenario (see Key assumptions) by 40% of the base scenario.

Expected environmental effects of green projects:

Provided on page 2–3 of this press release.

Information about the presence (absence) of conflicts of interest and independence of judgment.

No conflicts of interest were identified as part of the assessment process (see page 11 of this press release).

Conclusion:

The assessed financial instrument (bond), with regard to refinancing green projects, complies with Criteria 3.5 of the Green Project Taxonomy “Mortgage lending to individuals”.

¹⁹ As of the date of signing the Issue Decision.

ADDITIONAL INFORMATION

The assessment of the bond issue of DOM.RF Mortgage Agent LLC (ISIN RU000A106YR5), the project refinanced as part of this bond issue, and the report on the use of proceeds for 12 months of 2023 for compliance with internationally recognized goals, principles, standards, and criteria in the field of ecology and green finance (2021 GBP) and social finance (2023 SBP) has been performed based on the Methodology for Assessing Social Debt Obligations and Sustainable Development Debt Obligations with regard to sustainable development bond assessment.

ACRA’s opinion on the compliance of the bond issue of DOM.RF Mortgage Agent LLC, the project refinanced as part of this bond issue, and the report on the use of proceeds for 12 months of 2023 with internationally recognized goals, principles, standards, and criteria in the field of ecology and green finance (2021 GBP) and social finance (2023 SBP) is based on data provided by DOM.RF Mortgage Agent LLC, information from publicly available sources, and ACRA’s own databases. The assessment of compliance of the bond issue of DOM.RF Mortgage Agent LLC, the project refinanced by the bond issue, and the report on the use of proceeds for 12 months of 2023 with internationally recognized goals, principles, standards, and criteria in the field of ecology and green financing (2021 GBP) and social financing (2023 SBP) was solicited and DOM.RF Mortgage Agent LLC participated in the assessment process.

In carrying out the assessment, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodology.

No conflicts of interest were discovered in the course of the assessment process.

The assigned assessment is not a credit rating.