Money Markets
By GEOFFREY IRUNGU
In Summary
- The securities (ABS) are normally tied to a specific asset and backed by a company’s cash flows from it to ensure payment of investors.
- An ABS is typically subdivided into small units for sale through the securities exchange so that investors do not have to put in huge amounts of cash as is the case with bonds, where the minimum investment is currently Sh50,000.
Interest in asset-backed securities re-emerged this
year, with several institutions planning to issue these capital market
products in 2015.
While the law on such instruments has been in place since
2009, no company has issued any yet. Now, however, some county
administrations and companies looking for new ways to raise cash say
they are planning to issue various types of asset-linked securities.
These include a newly listed firm whose securities will be
sharia-compliant.
The securities (ABS) are normally tied to a
specific asset and backed by a company’s cash flows from it to ensure
payment of investors. An ABS is typically subdivided into small units
for sale through the securities exchange so that investors do not have
to put in huge amounts of cash as is the case with bonds, where the
minimum investment is currently Sh50,000.
Analysts say that companies issuing ABS have to
undergo rating by credit rating agencies to give investors confidence.
Trade in their securities must also be well regulated especially in view
of what happened in the United States, where mortgages sold to risky
clients were packaged into ABS and sold through complex derivatives to
investors who did not know they were based on low quality mortgages.
“We expect companies seeking to issue securities to
seek a rating,” said Alexander Muiruri, head of fixed-income sales at
Nairobi-based Kestrel Capital. “People will be asking about the credit
rating of the issuers so that they can have confidence in the
securities.”
According to CMA regulations, entities intending to
raise funds through the ABS need to be credit rated and the issuer must
publish its annual accounts in at least two newspapers of national
circulation.
Those that violate the regulations such as through
insider trading or giving false information face various penalties under
the Capital Markets Act including being suspended from the market by
the regulator, fines and reprimands.
In the case of a defective prospectus of
securities, for example, an individual can be fined Sh10 million or, in
the case of a company, Sh30 million.
KCB Group has indicated it is exploring the
possibility of issuing mortgage-backed securities – a form of ABS – to
free up cash sitting on its balance sheet for new lending. This will
involve repackaging mortgages into small units that can be sold to all
types of investors.
Vehicle and Equipment Leasing Limited (Vaell)
announced in November that it would seek to raise Sh8.5 billion through
an ABS. If they hold to their timetable, this might well be the first
ABS in the market. Vaell plans to use cash flows from vehicle leasing
deals to assure investors of its ability to pay. The deals signed will
serve as the “assets” to give confidence to investors to lend the
company cash.
The leasing company has already made significant
steps towards issuing the securities by applying for approval from the
Capital Markets Authority (CMA) and even appointed NIC Capital as the
lead arranger and placing agent for the issue.
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