Securitisation of future flow products vital

By Odhiambo Ocholla

Securitisation is a fairly recent financial innovation. The first securitised transactions occurred in US in the 1970s and involved the 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. In Kenya, the Capital markets Authority (CMA) enacted the Capital Markets (Asset Backed Securities) Regulations, 2007 to guide the securitisation transactions.

There is no reason why our capital market should not be part of this multimillion business. Securitisation is the securities backed by the cash flows from a pool of underlying assets.

In a typical future flow transaction, the borrowing entity (originator) sells its future products (receivables) directly or indirectly to a Special Purpose Vehicle (SPV), which issues the debt instrument.

Assets to be securitised

The types of assets capable of securitisation are limitless provided there is a predictable income stream. In the developed capital market, new assets are being securitised all the time. In recent years, there has been a move towards the cash flows generated by the business of an operating company being securitised.

Here the cash flows generated by the company are securitised and secured floating rate note issued on the stock exchange. This area of financing is becoming ever more popular as a financing tool for businesses.

The types of assets, which have been securitised are residential mortgage loans, hire purchase agreements, credit card balances and commercial loans. Some of the assets that can be securitised are; residential mortgage loans, car loans, credit card receivables, legal fees, future cash flow receivables, mutual fund fees, health care and insurance receivables, equipment loans etc.

For example, National Housing Corporation can issue mortgage-backed bond and realise the dream of putting up housing for the low-income earners

Encouraging securitised

Since the enactment of the Capital Markets (Asset Backed Securities) Regulations, 2007, not a single transaction has been structured under these regulations. Several constraints, however, have prevented the realisation of this potential. A major constraint on the growth of future flow transactions is the scarcity of good collateral. Thus, future flow deals can improve market liquidity and reduce market volatility, making them even more attractive to investors in other asset classes.

Securitisation of future flow receivables may be the only way to begin accessing the capital markets. An equally important incentive for governments to promote this asset class lies in the externalities associated with it. Future flow deals involve a much closer scrutiny of the legal and institutional environment.

Thus, these deals can produce enormous benefits by making valuable information available to investors. In addition, the preparation of a future flow transaction often involves reforms of the legal and institutional environment that facilitate domestic capital market development.

Policy to facilitate future flow-backed securitisations should focus on removing constraints. Educating policymakers and potential issuers would also help promote this asset class. Our capital market can play a part in this expanding area of financing in the context of providing the special purpose vehicles.

Why Securitisation

The innovative structure of these transactions allows many borrowers to obtain financing at much lower interest rates. Securitisation also allows 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. By using securitisations, these businesses can utilise their assets more effectively.

The writer is an investment banker. Email: nyabolla@gmail.com.