Securitisation in Egypt
by Ashraf Hendi & Esraa El Sayyad
Securitisation has been in the forefront of financial transactions in Egypt throughout the recent years. Many Egyptian companies prefer to raise funds through securitisation rather than the loan market to make use of their receivables in generating immediate cash flows. This has been particularly relevant for non-banking financial institutions and capital market companies whose balance sheets contain high volume of receivable accounts pertaining to their nature of activities.
Securitisation is the process used to issue bonds backed by other financial assets. It entails selling (or as the legal term suggests, assigning) the assets of a company (the Originator) to the bondholders - through a special purpose vehicle (SPV) – against immediate cash proceeds going the other way into the Originator that result from the subscription in the bonds by the bondholders. It is quite common for financial companies in Egypt, and other parts of the world, to raise funds through securitisation using their portfolio of receivables in activities such as financial leases, consumer loans, mortgages, and credit card debts of its customers.
The process of securitisation is a win-win situation for both financing companies and investors. For financing companies as an Originator, they can raise immediate cash at more affordable rates than they can get through commercial banks. This cash is generated through receivable accounts (in other words, the money a business is owed by its customers) sitting on their balance sheet that cannot be immediately collected (i.e., illiquid assets). They can utilize this cash in expansion plans or to increase their portfolio of customers and reach larger clientele.
Another benefit for the Originator is that the securitisation process does not entail the burdening terms of a loan agreement with a commercial bank. Commercial banks tend to include detailed terms about how the business is run, including restrictions on borrowing, selling of assets, and certain senior management decisions. These requirements can be demanding and costly for the business in terms of having to negotiate and secure the bank consent on common operational matters.
For Investors, they benefit from the income generated by the bonds which includes the principal and the interest on the bonds. Investors may also sell these bonds to another buyer at any time thanks to the liquidity of the bond as a security. It is commonplace in the Egyptian market that the securitization bonds are offered to private and high net worth individuals in a private offering. This allows entities such as commercial banks, money market funds, and investment banks to participate and subscribe in the offering.
There are different types of securitisations in jurisdictions around the world depending on the type of assets and the legal mechanism adopted in the process. The most common type adopted by Egyptian capital market financiers is the issuance of securities backed by accounts receivable in a “true sale securitisation” as the legal term goes. This process requires the Originator to hire different consultants that assist with requirements of offering and subscription by the regulator.
The Originator must have a financial advisor that prepare the financial model of the issuance. The financial adviser also arranges the financial roadshow for the bonds to promote to investors. There must be a legal adviser that prepares the documentation, conduct a due diligence on the assigned portfolio, and assist in fulfilling any legal requirements from the regulator. The bonds must be given a financial rating through an acknowledged credit rating agency, and the portfolio of receivables must be reviewed by an auditor.
The Egyptian regulator is the Financial Regulatory Authority (the FRA), which oversees all capital market activities as per the law. The process must comply and fulfill all the guidelines of the regulator issued in the form of regulations and directives. This is certainly in addition to the laws and by-laws pertaining to capital market activities and companies in general.
There is a similarity between the role of the regulator in giving the authorisation to offer the bonds, and commercial banks in loan transactions which authorise drawdown under the conditions precedent terms of the loan. The requirements are uniform and anticipated to a larger extent in the case of the regulator than commercial banks. In drawing this comparison, the time of drawdown (or effectively receiving the proceeds of the bonds by the Originator) is considered the most crucial and time-sensitive procedure in the process from the company’s perspective. The regulator has certain set of rules that must be followed consistently, as opposed to commercial banks which conduct lengthy negotiations to have more favorable terms of drawdown.
GGI memberMatouk Bassiouny & HennawyCairo, EgyptT: +202 2796 2042
Ashraf HendiContact Ashraf
Esraa El SayyadContact Esraa
Matouk Bassiouny is a full-service MENA region law firm, which prides itself on its in-depth understanding of cross-border cultural and business practices and on providing a commercial problem-solving approach to its legal services in supporting its clients in the region. The four main practice groups are Corporate Finance & M&A, Finance and Projects, Capital Markets and Dispute Resolution.
Ashraf Hendi is a Partner at Matouk Bassiouny & Hennawy’s Finance & Projects practice group and heads the firm’s banking sector. He joined the firm in 2018, he specialises in financing transactions and has represented clients in multiple syndicated and bilateral facilities, project finance and equity finance transactions.
Esraa El Sayyad is an Associate at Matouk Bassiouny and a member of the Finance & Projects team. She has diverse experience in energy and project finance. Her area of expertise includes the drafting and negotiation of facility agreements, finance and security documents and term sheets as well as the incorporation of establishments in Egypt.
