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Securitization is an alternative source of funding for regional companies

By Abdallah Roger Nassif
Securitization is the process of transforming assets into marketable securities. It started in the early 1970s in the United States, it then spread globally to become a technology commonly used by corporations to finance their growth in parallel to traditional instruments such as bank debt, plain vanilla bonds and equity.

In its most generic form it consists of setting up bankruptcy remote special purpose vehicles (SPVs), (ii) the SPV issuing securities to the capital markets and using the proceeds to acquire the assets from the originator on a true sale basis. Investors will have to rely on the cash generated by the assets to service their debt and in case of problems the investors will have to rely on the liquidation proceeds of the assets to be repaid.

This form of securitization is known as ABS, and it remains the most widely used one. The technology has evolved, and today when we use the word securitization we refer also to other formats, such as Future Flow Securitization, Whole Business Securitization or Synthetic Securitization.

Securitization was introduced to the regional market recently when a few deals took place just before the financial crisis. Deal flow is constrained by an unsupportive legal framework which renders the structures very complicated and too expensive, thus eliminating any economic sense in pursuing them. Other challenges include the availability and easy access to cheap funding, (ii) the unfamiliarity of both regional investors and potential originators with these complex products, and (iii) cultural issues related to reputational concerns and an admission of financial distress.

Despite the challenges, securitization makes sense as a financing tool now more than ever for both companies and potential investors. It allows corporates to access an alternative source of funding to traditional bank debt and equity; (ii) access off-balance sheet funding to grow the business while maintaining healthy financials; (iii) enhance financial ratios and reduce leverage without affecting the business; and (iv) manage risk by offloading a given portfolio of assets or reducing the exposure to a given sector.

At the same time, it allows potential investors to invest in usually scarce medium-term fixed-income instruments paying interesting yields compared to the prevailing interest rates; and (ii) access highly resilient instruments backed by properly ring-fenced assets and supported by other structural credit enhancements.

One of the most interesting features of ABS lies in the fact that investors will not be exposed to refinancing risk at maturity (which caused problems to a number of regional debt issuers and in some cases led to defaults) since the structures are self-liquidating.

Lately we have seen encouraging signs in markets like Saudi Arabia where companies sold portfolios of receivables to local banks (in some cases without recourse) through factoring. This is a confirmation that corporates are actively looking for alternative sources of funding in the market to finance growth. The question remains: how much longer will we have to wait to witness sale of receivables to SPVs (and not banks) that raised funds through the issuance of bonds or sukuk to the capital markets?

Abdallah Roger Nassif is head of structured finance at SaudiMed Investment Company. He led the execution of the first Islamic securitization to ever take place in KSA and the GCC, the first revolving auto ABS deal in the Middle East, the first rated oil and gas Islamic securitization out of the USA, the first ABCP conduit in the MENA region, the first term securitization deal using the new Lebanese securitization law, the biggest auto ABS out of Lebanon, as well as several private structured finance and principal finance transactions in the CIS space.

© Zawya 2012

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