By Odhiambo Ocholla

The enactment of Capital markets (Asset backed Securities) Regulations 2007, governing securitization transactions was lauded as long overdue then, against a back drop of an increasingly sophisticated capital market and the need to deepen our capital markets.

But to date there is no single transaction that has been structured under the securitization regulation.

The Asset backed securities regulations defines Securitization transaction as "means an arrangement which involves the transfer of assets or risk to a special purpose vehicle where such transfer is funded by the issuance of securities to investors and payments to investors in respect of such debt securities are principally derived, directly or indirectly, from the cash flows of the transferred assets".

Simply stated, a securitization is the term used to describe the process of issuing securities backed by the cash flows from a pool of underlying assets.

Government support

Securitization is a fairly recent financial innovation. The first securitised transactions occurred in the US in the 70s and involved pooling and repackaging of home mortgages for resale as tradable securities by lenders. Since then, securitised markets have grown in sophistication to cover a wide range of assets.

Securitisation looked a beautiful idea, but since CMA introduced regulations governing the issuance of asset backed securities it was more talked about than practiced today. I think the Government should support this type of transaction by using securitisation to further its developmental objective.

For example the Government can arrange to issue to investors some collateralised loan obligations, securitising loans extended by Youth Enterprise Development Fund or Women Enterprise Development Fund to small and midsize enterprises.

This will assist small businesses that are starved for cash. Under this arrangement and specially-designed scheme, small firms get access to capital, borrowing up to a certain limit without putting up collateral.

The loans are guaranteed by the Government and the loans are thereafter pooled and securitised. Then a bond can be issued against the securitized assets which can be broken into several tranches targeted at retail investors.

Need for Securitisation

It would be of interest by financial institutions to use securitisation as a mechanism to transfer risk, and thereby manage their balance sheets more efficiently.

In addition, corporates should look at securitization as a new source of financing. When the asset backed regulation was enacted a few years ago, the market expected to see increased growth in the use of securitisation funds to securitize corporate loans as well as the expansion of the securitization of consumer loans, future flows, and trade receivables.

The securitisation of trade receivables may prove an attractive source of funding for small and midsized enterprises (SMEs).The key problems facing SMEs seeking debt financing are lack of a credit history and lack of sufficient collateral. The thirdly, ability to service debts.

To address this problem, companies can use securitization financing. The innovative structure allows many borrowers to obtain financing at much lower interest rates, allow issuers to lengthen the maturities of their debt, improve risk management and balance sheet performance, and tap a broader class of investors.

Moreover, by establishing credit histories for borrowers, these deals enhance borrowers' future ability to access capital markets and reduce their borrowing costs.

Way forward

Several constraints, however, have prevented the realization of this potential. A major constraint on the growth of future flow transactions is the lack of good collateral. Securitisation of future flow receivables may be the only way to begin accessing our capital markets. Future flow deals entail additional incentives to firms going securitisation route.

It’s important to note that despite the numerous benefits offered by the securitization transaction and a robust regulation under the Capital market (Asset backed securities) Regulation 2007, companies have not yet seized the opportunity.

The need to develop securitizations market should not be overstated as it would become a valuable source of financing for many companies. For securitisation to work, of course, investors must demand the securities.

The writer works with Sterling Investment Bank.ocholla@sterlingib.com