ACRA CONFIRMS THE COMPLIANCE OF THE PLANNED BOND ISSUE OF LLP “MEGA-SPORT-KARAGANDA” WITH THE ICMA’S SOCIAL BOND PRINCIPLES

COMPLIANCE OF THE ISSUE WITH THE ICMA’S SOCIAL BOND PRINCIPLES¹

ACRA confirms that the planned bond issue of LLP “Mega-Sport-Karaganda” (hereinafter, the Company or the Issuer) complies with all the basic components of the 2023 edition of the ICMA’s Social Bond Principles (hereinafter, the 2023 SBP). The area in which proceeds will be used (the project funded through the bond issue pursues objectives that fall within ICMA social project categories, and also has a positive social effect), process of evaluating and selecting projects, management of proceeds and reporting presented in the “Sustainable Finance Policy of Limited Liability Partnership “Mega-Sport-Karaganda”² (hereinafter, the Policy) are fully in line with the 2023 SBP criteria, and consequently the bond issue can be considered as social.

¹International Capital Market Association
²Official site of Green Urban Association (greenurban.kz)

Sources: ACRA, issuer’s data

Founded in 2004, LLP “Mega-Sport-Karaganda” operates in the market of sports goods and equipment, sportswear, sports nutrition, and sports services. The Company has been expanding its activities with an emphasis on fitness services since 2024. The Policy is the Issuer’s key sustainable development document.

The Issuer provided ACRA with documents containing eligibility criteria for projects that can be financed through the issue of social bonds, the process for assessing and selecting projects, and approaches to managing funds and future reporting.

Based on the documents provided by the Issuer, the Agency has concluded that the bonds and the financed project comply with the four basic criteria of the 2023 SBP, namely:

• Use of proceeds;

• Process of evaluating and selecting projects;

• Management of proceeds;

• Reporting.

Use of proceeds

The objectives of the Issuer’s social bond issue are clearly formulated and comply with the 2023 SBP. The Issuer plans to use all the funds raised from the social bonds to finance the following project:

• Development of a chain of fitness centers in Kazakh regions, including investments in purchasing buildings and equipment of fitness clubs owned by World Class to a total of KZT 4 bln (hereinafter, the Project);

The Company plans to carry out the project in four of Kazakhstan’s cities: Aktobe, Astana, Atyrau, and Karaganda.

100% of the proceeds from the bond issue will be exclusively used to finance the Project corresponding to the ICMA social project categories — Access to Essential Services and Socioeconomic Advancement and Empowerment — stipulated by the 2023 SBP.

The Issuer provided the following materials to the Agency:

• The Policy;

• Draft issuance documentation;

• The Issuer’s charter;

• The business plan of the project to issue bonds to develop a chain of fitness clubs;

• The Project’s financial model;

• The planned structure of cash flows from the implementation of the Project;

• The Issuer’s interim condensed financial statements for the nine months of 2024 ended September 30, 2024, and the independent auditor’s report;

• The conclusion of the financial consultant regarding the Issuer’s financial standing as of September 30, 2024 and determining the Issuer’s ability to meet its future obligations under the bonds planned for issue;

• The Agency’s questionnaire filled out by the Issuer;

• Additional market research and regulatory acts  provided by the Issuer at the Agency’s request;

• Answers to the Agency’s additional questions.

The Issuer determined the following social issue that the Project intends to address: “Low involvement of the adult population of the Republic of Kazakhstan in sport amid, among other things, low coverage of the population by sports and mass events on a systematic basis; inaccessibility of sports infrastructure due to a lack of incentives for businesses to reimburse costs by reducing prices or for the construction of sports infrastructure”.

The national social significance of this problem is confirmed by the Republic of Kazakhstan’s Concept for Developing Physical Culture and Sport for 2023–2029, which was approved by Decree No. 251 of the Government of the Republic of Kazakhstan on March 28, 2023, as well as research carried out by the World Health Organization and independent market research.

The Policy involves the following areas that are planned to be financed using proceeds from the issue of the social bonds (including, but not limited to):

• Expanding access of all population groups to sports infrastructure and sports services;

• Eliminating and preventing public health problems associated with low physical activity;

• Rehabilitation of adults and children, including inclusive and post-traumatic rehabilitation;

• An active longevity program and broadening the elderly contingent in regular sports activities;

• Creating and expanding safe and favorable conditions for sports and physical activity for women;

• Promoting sustainable development through the implementation of charitable and socially oriented initiatives.

As part of the Policy and draft issuance documentation, the Issuer determined the following target groups (including, but not limited to), whose needs the Project is aimed at meeting:

• People with limited physical activity (due to excess weight, obesity, cardiovascular diseases, diseases of the musculoskeletal system, respiratory diseases, etc.);

• People with medical problems and diagnoses, including those associated with acquired limitations of physical activity (post-traumatic syndrome, postoperative period, recovery after a long illness, etc.), as well as those at risk;

• Women;

• Senior citizens (50+);

• Children and teenagers.

The Issuer confirmed that part of the services of the specified fitness centers will be provided at discounted rates exclusively for the abovementioned target groups. At the same time, the Agency notes that the Issuer has not previously kept records of the specified target groups as part of the general pool of clients and plans to implement such records to track the targeted use of funds received as a result of the issue of social bonds and to generate reports on the issue in question (see below). Determination and confirmation of the share of the above target groups from the total number of visitors to the above fitness centers is the subject of monitoring.

ACRA believes that the proposed use of funds raised from the issue of the analyzed bonds complies with the 2023 SBP.

Process of evaluating and selecting projects

The process for evaluating and selection projects is described in the Policy.

As per the Policy, the Project is categorized as a social project because it aims to ensure access to social services, drive socioeconomic development, and broaden rights and opportunities.

The Policy indicates that the “proceeds from the placement of issued social bonds will be used to extend the network/modernize fitness centers in the country’s regions, as well as to finance new and/or existing areas of the Company’s activities, which will deliver social benefits in terms of creating accessible infrastructure, providing access to sports services, and creating favorable socioeconomic conditions”. The Issuer has determined the areas for using funds from the bond issue and also provided a description of the social effects for each area.

The Issuer did not create a work group or a dedicated division to select the Project as part of the analyzed bond issue. The Project was selected based on the Policy. The Agency views this approach as acceptable, taking into account the fact that the Issuer’s operations are solely related to providing sports services to the population and selling related products.

At the same time, the Policy states that “if proceeds are invested in new projects and/or areas of the Company’s activities, a Work Group will be created to select and assesses the acceptability of social areas” that meet the requirements specified in the Policy.

The Project selected by the Issuer for the assessed bond issue is part of the categories Access to Essential Services and Socioeconomic Advancement and Empowerment as per the 2023 SBP, which correspond to the following United Nations Sustainable Development Goals (UN SDGs):

• SDG 3: Ensure healthy lives and promote well-being for all at all ages;

• SDG 5: Achieve gender equality and empower all women and girls;

• SDG 10: Reduce inequality within and among countries

The Policy states that the Company “adheres to global principles and provisions of international and national standards, deploys and disseminates sustainable development and ESG approaches and mechanisms (the Sustainable Development Goals adopted by the General Assembly of the United Nations in 2015 and the Strategy of the Republic of Kazakhstan on Achieving Carbon Neutrality by 2060 approved by Order of the President of the Republic of Kazakhstan No. 121 dated February 3, 2023)”. At the same time, the Issuer does not have a business development and sustainable development strategy (or other similar documents), which limits the assigned assessment.

The appendix to the Policy provides a description of the Company’s economic and environmental risks, as well as measures to neutralize them, including with regard to the analyzed Project. At the same time, a more detailed assessment of the risks of the Project was not provided, which limits the assessment.

The Issuer presented to the Agency the business plan for the bond issuance project for the development of a chain of fitness clubs; the financial model of the Project; and the planned structure of cash flows from the Project. According to these documents, the Issuer plans to purchase buildings and equipment for four fitness clubs operating, at the time of the assessment, in Kazakh cities (Aktobe, Astana, Atyrau, Karaganda) on the basis of the franchise acquired from the Russian chain World Class. In addition, an external adviser was involved in evaluating the financial feasibility of the Project (an independent opinion on the Project’s business plan and the Issuer’s financial standing was presented to the Agency).

At the same time, the Issuer did not involve external experts to select the Project and assess the social effects of its implementation.

In general, in ACRA’s opinion, the project evaluation and selection process described above is relatively efficient and consistent with market practices and the 2023 SBP.

Management of proceeds

The procedure for managing the issue proceeds is set out in the Policy, which states that “proceeds received by the Company from the issue of social bonds and/or an equivalent amount may be credited to a special account of the Company until their allocation.”

In addition, the Issuer indicated that “a portion of the funds from operations will be accumulated in separate accounts for paying coupons and repaying the principal on the bonds. Control over the return and targeted use of proceeds from the social bonds is carried out by the Chief Accountant of the Company”.

The Issuer will notify bondholders and potential investors about the allocation of proceeds via the website of Kazakhstan Stock Exchange JSC www.kase.kz and the website of the Financial Reporting Depository www.dfo.kz.

According to the Issuer, “any unallocated proceeds may be temporarily invested in eligible financial instruments, namely, liquid and highly reliable financial instruments in accordance with the decision of the Company’s management”. At the same time, the Issuer indicated that “it will take every effort to invest temporarily available funds in social projects/areas as soon as possible in accordance with the Company’s current internal regulations and the Policy”.

The Issuer will also involve an auditor to verify the intended use of proceeds from the issue of social bonds.

The Agency notes that the potential risks of misuse of proceeds are partially reduced, since 100% of the proceeds will be used for the implementation of the Project related to the Issuer’s core business.

Taking into account the approved Policy and draft issue documentation, the Agency considers the funds management procedure to be sufficient in terms of information disclosure to investors.

ACRA is of the opinion that the procedure for managing the proceeds from the bond issue is sufficiently consistent with the 2023 SBP.

Reporting

According to the Policy, the Issuer “will compile, on an annual basis, a report on the use of proceeds from the issue of social bonds, starting from the reporting year in which the bonds were issued, and until the proceeds are fully repaid”.

The Company will disclose information about the use of issue proceeds, investment areas, environmental effects, social effects and sustainable development in its annual report, including a description of the effects of the bond issue.

According to the Issuer, the report on the allocation of issue proceeds will disclose, among other things, the following information:

• Par value of the issued social bonds, indicating their key characteristics (date, currency, interest rate, maturity, etc.);

• Amounts of allocated and unallocated proceeds from the social bond issue;

• Progress in the implementation of the Project.

In compiling the abovementioned report, the Company will be guided by the ICMA’s Harmonised Framework for Impact Reporting for Social Bonds Handbook, the Policy, and current internal regulations of the Company. The Director of the Company is responsible for preparing the reports.

According to the Policy, the Company will also approve and monitor the following indicators of social impact on involving various groups of the population, including target groups, in sports and physical activity:

Access to socially important services:

• Number of people who have access to sports infrastructure;

• Number of the Company’s clients assigned to the target groups;

• Dynamics of investment in new equipment for target groups;

• Number of specialized programs for target groups;

Job creation:

• Number of people who have received new jobs;

• Number of people who have been trained in new professional skills;

Socioeconomic development and empowerment:

• Number of women who have access to employment opportunities with equal pay;

• Number of people, including those from the target groups, who attended lectures/completed training in healthy lifestyle.

The Company will expand the scope of its subscription questionnaires and, if necessary, deploy appropriate software that helps categorize clients into the target groups. In addition, to ensure an increase in the proportion of clients belonging to the target groups, the Company will regularly carry out a number of marketing activities and social projects throughout the maturity of the social bonds.

In the context of each group, the Issuer presented the dynamics of planned indicators up to 2029, as well as key assumptions in the calculation of planned indicators.

At the same time, the Agency notes that the Issuer has no experience in issuing social bonds, or preparing reports on the use of proceeds, or compiling sustainable development reports.

In the Agency’s opinion, the above information disclosure procedure is sufficiently consistent with the 2023 SBP.

additional assessment factors

Organizational structure and strategy

The Issuer has identified social goals of the social bonds and tied them to UN SDGs.

At the same time, the Issuer does not have any dedicated subdivisions in charge of the implementation of the Project.

The Issuer is generally focused on sustainable development, which is confirmed by the facts set out in the Policy. However, at the time of the assessment, the Issuer did not have any other sustainable development policies and procedures, or specific business development and sustainable development strategies or other similar regulations.

The Agency conservatively assesses the overall quality of the Issuer’s corporate governance and strategic planning and notes the moderate level of information transparency of the Issuer.

Financial feasibility of the project

The Issuer presented the business plan for the Project, the financial model of the Project, and the planned cash flows from the Project.

The Issuer will purchase four fitness clubs located in the abovementioned cities of Kazakhstan, after which the Issuer will 1) modernize the fitness clubs; 2) expand the list of specialized programs; 3) introduce preferential programs. Having reviewed the presented materials, the Agency assesses the financial feasibility of the Project as moderately high.

At the same time, at the time of the assessment, the Issuer does not have a credit rating, which limits the assessment.

key assumptions in estimating social effects

• The Company will break down its current portfolio of clients by target group.

key assumptions

• Use of proceeds from the social bond issue as intended;

• Implementation of the Project in accordance with the information presented by the Issuer.

assessment components

Compliance of the bond issue with the 2023 SBP: yes.

Assessment level: SR3.

additional information

The assessment of the Project to be financed as part of the social bond issue of LLP “Mega-Sport-Karaganda” for compliance with internationally recognized principles and standards in the field of social finance and/or sustainable development, as well as the bonds themselves — for compliance with the 2023 SBP — has been performed based on the Methodology for Assessing Social Debt Obligations and Sustainable Development Debt Obligations and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

ACRA’s opinion on the compliance of the Project to be financed using the proceeds from the bond issue of LLP “Mega-Sport-Karaganda” with internationally recognized principles and standards in the field of social finance and/or sustainable development, and also on the compliance of the bonds of LLP “Mega-Sport-Karaganda” with the 2023 SBP has been published by ACRA for the first time. The compliance assessment may be revised within one year following the publication date of this press release.

ACRA’s opinion on the compliance of the Project to be financed using the proceeds from the bond issue of LLP “Mega-Sport-Karaganda” with internationally recognized principles and standards in the field of social finance and/or sustainable development, and also on the compliance of the bonds of LLP “Mega-Sport-Karaganda” with the 2023 SBP is based on data provided by LLP “Mega-Sport-Karaganda”, information from publicly available sources, and ACRA’s own databases.

The assessment of compliance of the Project to be financed using the proceeds from the bond issue of LLP “Mega-Sport-Karaganda” with internationally recognized principles and standards in the field of social finance and/or sustainable development and the assessment of the compliance of the bonds of LLP “Mega-Sport-Karaganda” with the 2023 SBP are solicited and LLP “Mega-Sport-Karaganda” participated in the assessment process.

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

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