How securitisation can spur economic growth in Kenya

When Rock’ n’ Roll star David Bowie securitised his music royalties and raised $55 million (Sh5.6 billion) in 1997, music producers and investors alike thought this combination was the best thing to have ever happened since sliced bread.

The “Bowie bonds” asset backed securities were backed by the future music royalties that he would receive from the 25 albums he had recorded before 1990.

In doing so, he raised money in advance to finance his music production and his royalties were used to pay back the tradeable securities.

Securitisation involves turning assets that produce predictable cash flows into tradeable securities. The cash flows are then used to back the payments that will be made to investors.

Assets like mortgages, bank and auto loans, receivables, royalties, utility payments which are rather illiquid can be converted into tradeable securities and issued to investors in a securitisation transaction.

According to the Kenya Bureau of Statistics, economic growth declined to 4.4 per cent in the third quarter of 2017 compared to 5.6 per cent in a similar period in 2016. There is therefore need to embrace creative capital raising solutions to fuel more aggressive economic growth. Securitisation is just one of the ways to capital formation.

Although there is still a dark cloud lingering on how loan securitisations were partly to blame for the 2008 global financial crisis, significant lessons have since been learnt.

Key among these lessons is the need to correctly assess the risks and price them, to determine the cash flows and predict them accurately, having a larger pool of negative correlated assets and proper credit rating practices.

Any asset with a stable cash inflow can be securitised. The National Housing Corporation — whose mandate is to provide housing to citizens — could package its loans, securitise them and get immediate finances to build more houses for citizens.

READ: Why a good job doesn’t guarantee you decent housing

On the other hand, the bonds issued from the securitised house loans provide a good investment destination for long term savings.

The next housing phase would be done, securitised and money raised for another phase. This would eliminate the need to wait until all the houses have been sold or a substantial amount of loans repaid before it can start the next housing project. It would also reduce reliance on government funding.

The South African Home Loans Ltd, a mortgage finance provider in South Africa, did its first mortgage backed securitisation in 2001 and has launched 11 residential mortgage backed securities over the last 10 years, with a collective value of R20 billion (Sh170 billion).

The impact this has had on providing affordable housing options to South Africans is worth emulating. Passenger trains on the standard gauge railway are always fully booked.

This stream of income can be packaged, securitised and money raised to expand operations of the SGR to other profitable routes without relying on external loans.

The Kenya Ferry Services places charges on vehicles which use its service to cross the Likoni channel as well as ferry cruises. This stream of income is also a good candidate for securitisation.

Money can be raised to expand and modernise its operations as well as raise finances for the construction of the proposed bridge with only partial reliance on government funding.

Considering it is a mega project estimated to cost Sh80 billion, the government could raise a percentage and play the role of guaranteeing the asset backed security that will be issued to fund the balance as opposed to meeting all costs through debt.

The Higher Education Loans Board (Helb) has a good pool of student loans which can be securitised and money raised to provide more loans to students.

While the loans being offered at four per cent would need financial reengineering considering that the Central Bank Rate is at 10 per cent, the alternative loans Helb gives to salaried Kenyans charged at 12 per cent offer a good opportunity for securitisation.

This would enable Helb to raise more capital to loan more needy students. In a deal finalised in December 2017, the UK raised 1.7 billion sterling pounds from securitising over 400,000 student loans.

Mortgages and loans in many bank balance sheets add to the list of assets that can be securitised.

The growing savings and credit cooperative societies also have pools of loans that can be securitised to enable these institutions raise additional capital.

The impending launch of the Kenya Mortgage Refinance Company to take all these mortgages off institutions’ balance sheets could be transformational as was the case with Cagamas Berhad in Malaysia.

Through a widely researched and consultative process, the Capital Markets Authority issued the Policy Guidance Note on the issue of Assets Backed Securities. The PGN gives a clear framework within which securitisations can be structured in Kenyan capital markets.

It is upon business leaders to explore the opportunities and transform the country into a middle income country providing high quality life to citizens as envisaged in Vision 2030.

Nyale Yanga is head of financial analysis at Capital Markets Authority.