The requirement will see the issuers of notes typically backed by receivables either hold equity in the special purpose vehicle carrying the security, or acquire a percentage of the ABS itself.
Interest held ranges between five and 10 per cent in most markets.
KCB in 2015 had raised the possibility of issuing mortgage-backed securities.
Sellers of asset-backed securities (ABS) will be required to buy part of the debt themselves as a way of sharing the risk with investors, new Capital Markets Authority guidelines say.
The requirement will see the issuers of notes typically backed by receivables either hold equity in the special purpose vehicle carrying the security, or acquire a percentage of the ABS itself.
The retention of an ongoing interest in the security by the seller is known as having “skin in the game” and is a feature in many of the markets that have asset-backed securities.
Interest held ranges between five and 10 per cent in most markets.
“The skin in the game requirements proposed in many jurisdictions and adopted in some are intended to address the misalignment of incentives of originators and ABS investors by motivating originators to continue to originate and underwrite high quality loans because it would also share in the pain of losses if such loans failed to perform as projected,” says the CMA in policy guidelines on ABS.
“At this stage the CMA does not propose to apply a minimum skin in the game requirement but will require each transaction to disclose what level will be applied and provide an explanation for the percentage retention set and its implication to investors.”
The guidelines have now set the stage for the issuance of bonds/notes in the market, with a number of firms stating in the past that they were considering this avenue for project finance. So far, the only security in the market that is backed by an asset is the gold exchange traded fund issued by Barclays #ticker:BBK and NewGold in March.
KCB #ticker:KCB in 2015 had raised the possibility of issuing mortgage-backed securities — a form of ABS which would involve repackaging mortgages into small units that could be sold to different types of investors.
Vehicle and Equipment Leasing Limited (Vaell) had also announced in November 2015 that it would seek to raise Sh8.5 billion through an asset-backed bond.
Issuers were, however, held back by lack of clarity on conflicting clauses between the Capital Markets Act and the Capital Markets (Asset Backed Securities) Regulations, 2007. CMA has now said that the Act takes precedence over the 2007 regulations, which are effectively repealed.
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