Capital Markets

Cash search drives demand for asset backed securities

BANK

A KCB banking hall: The bank plans to issue mortgage- backed securities. PHOTO | FILE

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.

READ: Counties to start borrowing money backed by assets

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.

READ: Vaell seeks nod to issue Sh8.5bn bond

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.