The future might see an increasing number of companies reverting to securitisation for financing. Niveen Wahish reports Despite having talked about it for years, securitisation has only materialised recently. Securitisation is the process of selling both cash-flow producing and illiquid assets like loans or non- conventional loan packages, to investors who have an interest in the cash- flow generated by asset-backed loans. Bonds are issued on these assets in the form of securities sold on the capital market. The activity of securitisation was allowed in Egypt through a modification of the Capital Market Law in November 2004. The first company to test-drive securitisation was Contact Securitisation which issued LE140 million five-year bonds at LE100 each, and an 11 per cent interest coupon. Contact Securitisation is 81 per cent owned by the Egyptian International Company for Trade and Investment, 18 per cent owned by Contact Cars and one per cent owned by Bavarian Contact Cars. More recently, in June, the Egyptian Arab Land bank (EALB) also issued LE500 million worth of five-year bonds. These carry an interest coupon of 1.5 per cent above the Central Bank of Egypt's lending rate. And, more is yet to come. EALB is working on another package worth LE750 million to be issued by the end of the year, while Contact is also planning another issue. Although he would not disclose its exact size, Amr Lamei, general manager of Contact Cars said this will not be smaller than the first issue. That brings the total size of securitisation bonds to less than LE2 billion. This is a modest figure when compared to some $625 billion in the US in 2004. Lamei and his partners had securitisation in mind when they first set up their company. But they did not revert to securitisation, since it had not been activated yet. Without securitisation, a company's only source of financing would be to draw from its capital, or borrow from the banks. However, capital is bound to be expended, while borrowing from the banks has its limitations. The amount borrowed would need to be proportionate to the capital. As Lamei put it, "it is an unlimited resource of financing that is long-term, and provides the possibility of off-balance sheet funding." Ideally as well, financing through securitisation should incur a relatively low cost, compared to borrowing from the banks because asset-backed securities are considered amongst the lowest in risk. Securitised bonds can be issued for as long as 20 or 30 years. This is why they are particularly important for long-term lending activities such as mortgage finance. But this is practically not yet possible since there is currently no benchmark for 20-year bonds in Egypt. The Ministry of Finance issues only one 20-year treasury bond, which is not sufficient to act as a needed benchmark. These asset-backed bonds are considered low-risk for various reasons. One is that they are backed by assets which are insured. Apart from issuing securitised bonds, a credit-rating agency which must be licensed by the CMA, performs credit-rating of the securitisation portfolio, as well as of the bonds. It also rates the securitisation portfolio annually during the bond's lifetime. The portfolio is rated as an indicator of the quality of loans. The bonds are also rated, showing the ability of the company to pay the bonds back. The legal and regulatory framework in Egypt makes possible the issuance of securitised bonds. This is done by a securitisation company, to which an originator sells the securitisation portfolio, as Contact Cars did. The securitisation portfolio is then transferred (sold) by the originator to a special-purpose legal entity, the "securitisation company", which issues the bonds. The law also allows for the issuance of securitised bonds by an originator as an issuer. This is what EALB did, in which case the originator of the securitisation portfolio is itself the issuer of the securitised bonds. Other players in the securitisation process include the custodian who receives all documents and information related to the securitisation portfolio, once it is assigned to the bond. It also receives all the funds collected, and pays bond interest as well as principal to the bondholders on the due date. It also invests any surplus funds in treasury bills, or bank deposits. The servicer collects the financial rights under the securitisation portfolio as an agent. It pays all funds collected to the custodian and takes all needed collection action. This includes foreclosure on the collateral, if a debtor defaults. According to one expert who preferred to remain anonymous, the securitisation process has been successful as regards the needed infrastructure which has already been laid out. As more companies issue securitised bonds, such bonds will increase in the market. This in turn will grow the overall bond market. This currently stands at around LE56 billion, 90 per cent of which is government bonds. There have been only four fixed-rate corporate bond issues in the past five years. Two were by Orascom Construction Industries, one by the Egyptian Cement Company, and the other by Telecom Egypt. Two problems currently plague the bond market according to the expert. The first is the lack of supply. This makes investors thirsty for such bonds. The Contact bonds were two and a quarter times oversubscribed. Another problem is that individuals are not aware of the bond market, and remain fixated on stocks. This in turn has resulted in a situation where there is no active secondary market in which bonds may exchange hands. However, as supply increases and more individuals enter the market, the secondary market could develop, said the expert.
