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Deepening local bond markets in the WAEMU through securitization

25.03.2013Anna Selejan

Securitization is a financial engineering technique that enables a private or public entity to raise cash by selling its cash-flow producing assets or its future revenues. These assets are sold to a Special Purpose Vehicle (SPV) which, in order to raise the needed cash, issues fixed income securities on the local capital market.

Although widely used in developed countries and in some parts of Africa (Morocco, Tunisia, South Africa and Nigeria), securitization is a new concept in most Sub-Saharan countries. In the WAEMU, asset securitization has been possible since 2010 when the regional regulator (the CREPMF) issued the relevant texts. The law allows for a very large spectrum of FCFA-denominated assets to be securitized: besides traditional mortgages, it is possible to securitize any kind of existing assets and even future cash flows. Moreover, there is no restriction on entities that can sell their assets: they can be financial and non-financial companies, as well as public sector entities. However, no securitization transaction has occurred yet in this part of Africa. This article explores how securitization can contribute to the development of the local bond markets.

The public debt market in the WAEMU presents numerous challenges to both potential issuers and investors. Issuing costs are high relative to other forms of debt financing and almost all corporate issuers need to have their bonds partially or fully guaranteed by a Development Financial Institution (DFI) or a guarantee fund, which further increases costs. Sovereign or quasi-sovereign issues dominate the bond market, and there is little credit discrimination among these bonds and the guaranteed corporate ones, they have more or less the same risk/reward profile. Maturities are concentrated in the 5-year segment with only a couple of bonds issued at 7 or 10 years. In a nutshell, the fixed income universe in the WAEMU is quite homogeneous, offering investors little choice in risk, yield and maturities.

The CREPMF has recently introduced the possibility of substituting a guarantee with a financial rating given by one of the 2 licensed rating agencies. This action would allow for more credit discrimination among securities, since interest rates would reflect the real credit risk of each issuer. However, the first bond without guarantor and with a credit rating is yet to be issued.

Asset securitization can be the solution for private and public sector entities looking to raise cash, as well as for investors keen on diversifying their portfolios, while substantially increasing the depth of the local bond markets. Through securitization, companies can monetize part of their good-quality assets or future revenues by selling them to a Special Purpose Vehicle (SPV), thus raising cash without having themselves direct recourse to capital markets. If the securitized assets are worth more off-balance sheet (translating into lower borrowing costs against the specific assets than against the company’s entire balance sheet), raising cash through securitization is much more cost-efficient than issuing company debt. With the advent of financial rating, securitization can help curb financing costs for companies that are considered risky and thus have a lower credit rating than part of their assets would.

For example, the first securitization transaction in Morocco that took place in 2002 involved a mortgage pool securitization for Crédit Immobilier et Hôtelier (CIH), a bank who wished to restructure its balance sheet. Through the true sale of a quality mortgage portfolio, CIH was able to raise DH500M (approximately $45M) through the indirect issuance of two senior and one junior tranche. The longest (16-year) senior tranche was issued with a 7.32% annual coupon, only slightly above the 7.1% coupon offered on a 15-year Moroccan government bond issued some months earlier. Had the CIH issued under its own signature, its borrowing costs would have been much higher.

Governments could also resort to securitization of existing assets or future flows, in order to reduce budget deficits, as well as to finance future investments. The Italian and Belgian governments in the late 90s both securitized outstanding social security receivables, thus putting them off-balance sheet in order to reduce their budget deficits to comply more easily with the Maastricht criteria. In 2004, the Government of Hong Kong SAR decided to securitize the future toll revenues from state-owned tunnels and bridges, thus raising a total amount of HK$6 bn (approximately $800M). The state government of West Bengal (India) raised Rs.15 bn (approximately $300M) through the securitization of future taxes levied on several fuel products. Apart from instant cash inflow in an alternative way, these kinds of transactions allow public authorities to have a better asset-liability management, by matching public asset cash flows to the repayment of the asset-backed securities, and a more efficient cost-benefit analysis and hence management of public assets, by clearly earmarking revenues to be used to fund them, instead of relying on general tax-backed funding. Moreover, future flow securitizations involve a thorough assessment of the sovereign originator’s legal and institutional environment, notably recovery processes and claim enforcement rules, which can foster necessary institutional reforms. This in turn can have a positive spill over effect on general investor confidence.

Securitized assets are carefully selected and their future behaviour (future cash-flows) is thoroughly modelled. The future cash-flows (and the risk of non-payment associated with them) are then structured into fixed income securities (tranches) of different risk-return profiles. Thus the same asset pool will serve as a funding source for senior (low-risk, low-return) and junior (higher risk, higher return) securities. The basic idea is to spread the risk unevenly among tranches and reward investors according to the amount of risk taken. For example, the above cited Moroccan mortgage-backed securities were issued in 3 different tranches, all offering different risk exposure, maturity and remuneration.

Getting exposure to a specified pool of assets and having the possibility to select the desired risk-return investment profile are clearly two important steps forward in the development of the local bond markets. While until now, investors could basically subscribe to two kinds of risks (sovereign and quasi-sovereign), with relatively low risk profiles, with the introduction of asset-backed securities, investors will not only be able to get exposure to a new risk classes, but they will also be able to select how much of it they want to hold (by choosing either the senior or more junior tranches). The asset-backed securities also introduce the notion of real credit risk: that of not being able to get back 100% of their initial investment or all coupons, based on the underlying asset pool’s overall performance.

Are institutional investors ready for the big change? Definitely. Are companies and national treasuries ready to add securitization to their list of financing options? Not quite so. Securitization, and financial engineering in general, are quite unknown concepts for the majority of companies in the WAEMU. The subprime crisis has not helped much either in popularizing the concepts in a positive sense. Since companies have traditionally raised cash through banks or DFI loans, a large part (if not all) of their asset base is pledged as guarantee, so there is little room left for alternative asset-based financing. Securitization offers a different perspective on assets: they are no longer considered as an end, but rather as a means to optimize a company’s financing. Realizing this concept may take some time and may need a more innovative state of mind.

We believe that education is key to the success of any financial innovation and that applies in the WAEMU as well. Once public and private sector decision-makers thoroughly understand the concept and philosophy of securitization, it will no longer appear as a mystical, complex and ultimately risky alternative. Bonds issued in this fashion will tap into huge reserves of regional savings (through asset managers and insurance companies) and thus further enhance the efficiency of local capital markets.  

Anna Selejan has been the Managing Director of ALC Titrisation, the first privately owned securitization SPV management company in the WAEMU, based in Abidjan, Côte d’Ivoire. Prior to setting up ALC Titrisation, she worked as Vice President – Investment Management with IC Securities, a Ghanaian asset management company and as Fixed Income and SRI (Socially Responsible Investment) portfolio manager with Allianz Global Investors in Paris (France) for several years. She holds a Master’s degree in Economics from the Budapest Corvinus University, Hungary and a Master’s degree in Portfolio Management from Université Paris XII, France.

African Infrastructure: Mobilizing Domestic Capital

25.01.2013Cédric Mbeng, Bim Hundal

Investing in and building out much needed infrastructure is one of the key challenges facing Africa. The task is vast and complex. But without making significant headway in meeting this challenge Africa’s promising economic renaissance could be imperiled. Africa is enjoying the benefits of a decade long boom in commodity prices which has propelled economic growth. It is hard to imagine this growth can be sustainable or that its benefits can be broadly shared without investment in roads, rail, ports and maybe most importantly power.

Meeting this challenge will need African governments to think innovatively, to push forward boundaries on the development of their financial markets and to ensure they have ambitious and well thought out plans for infrastructure.

Finance remains a crucial constraint. The African Development Bank and World Bank estimate the financing needs to be in excess of $93 billion per year (AICD, 2009). The Programme for Infrastructure Development in Africa (PIDA) study on key regional projects, endorsed by the 2012 African Union (AU) Summit, estimates a need of $68 billion out to 2020 just for that particular list of projects. These numbers are daunting. But the challenge has to be met; the future of Africa demands it.

In meeting these funding needs African governments need to be aware of several emerging and important trends. Firstly, it is increasingly felt that the financing strategy should be determined by African (ie the users of funds) not just by the international community (ie the traditional providers of funds). Secondly, African governments are aware that they can use the global markets as a source of funding at competitive rates and for significant amounts. The global investor base is more open to African credits than ever before. This has been well underlined by the recently successful bond offering by Zambia and by the performance of outstanding issues from the likes of Ghana and Nigeria.

But a clear new departure for the way forward is for Africa to think about how to use its own resources to meet it financing needs. In particular how can African capital markets be developed to provide finance for infrastructure.

One innovative instrument that has been used in other emerging markets is the ‘project bond’. This is eminently suitable for infrastructure finance because many infrastructure transactions are financed using ‘project finance’. Thus a ‘project bond’ is merely a bond instrument that works similarly to a project loan in that the financing is executed directly with the project vehicle or Special Purpose Vehicle (SPV) and the bond is repaid from the cash flows of the project. While the credit quality of the sponsors may in some affect the credit quality of the SPV, a project bond does not rely directly on the credit quality of the balance sheet of the sponsors.

Project bonds have been broadly used in other countries most notably Chile, Malaysia and Korea (Mbeng Mezui, 2012). In each case the government implemented reforms in the pension and insurance sectors to unlock long-term capital. This created a deep pool of institutional investors with demand for low risk, long dated assets in domestic currency. This investor base is ideally suited to buying project bonds or infrastructure investments. That they have a preference to invest in local currency meant that the projects could avoid any currency mismatches between revenues and debt service. In addition to policies to develop an institutional investors base these governments also crucially implemented economic policies that prioritized macroeconomic stability particularly in bringing down inflation and prevailing interest rates. Indeed in Chile the economy undertook broad based indexation which gave long term fixed income investors additional comfort in holding long term assets. That was an innovative solution used by policy makers and financial institutions in Chile and there is nothing to say the same structure needs to be adopted by others. But what is important is to have a long term strategy of seeking economic stability and creating institutions that will accumulate capital and will focus investment on long dated assets.

Alongside policies that can encourage the creation of pension funds is a need to ensure securities market regulations are in place to give investors comfort that their interests are protected and that procedures exist that enable institutions to invest and meet their fiduciary requirements. It is important once securities markets are created that legislation be passed to ensure that issuers provide satisfactory levels of disclosure and that the information given in prospectuses or other documents is transparent and meets the standards of institutional investors. It is vitally important that as domestic African capital markets develop they adopt internally acceptable standards. This is vital to building investor confidence.

Finally, governments must establish professional and efficient infrastructure departments that undertake the work necessary to get projects approved and ready to be taken to the financial markets.

If African governments can successfully implement these various policies not only will catalyze significant volumes of domestic capital into their infrastructure programmes but they will also set in motion the development and greater sophistication of their financial markets. This will be hugely beneficial to those economies as they face the challenges of development in the years to come. Project bonds can be the instrument to catalyze these various changes.

Already many African have in place the institutions and regulatory framework to allow for the issuance of project bonds and other innovative products that finance infrastructure. These should be strengthened and stakeholders should be encouraged to use the domestic capital markets. Alongside this African banks should be encouraged to work across the continent and to augment the capabilities of the capital markets.

International markets are undergoing great change. Many international banks are pulling back from infrastructure. But with supportive policies African countries can ensure they have increasing financial resources from its own markets. This will only serve to make Africa’s recent resurgent growth more sustainable and robust.

Bim Hundal: Chairman Lion's Head Global Partners
Cedric Mbeng Mezui: Senior Financial Economist, African Development Bank

Financing Africa’s Infrastructure Gap

14.02.2011Mohamed Hassan

When we talk about Africa’s infrastructure finance gap it is easy to be pessimistic.  I am not.  I am an optimist.
Some see the gap as a problem, a major challenge. But while I agree this finance gap is a challenge, I see it primarily as an opportunity – an opportunity for the private sector to maximise returns on their investment in what is a nascent market.

The highly-regarded Africa Infrastructure Country Diagnostic study (don’t be put off by the title) recently concluded that an annual investment of over $90 billion is required over the next ten years if Africa is to bring its infrastructure to the levels of other developing regions of the world.
About half of these investment needs are currently being met through official development assistance, foreign private sector investment  and, often overlooked, domestic investment  from within Africa.  In fact, the African taxpayer is the biggest investor in African infrastructure.  So it is not all gloom.  

African governments are not only committing public resources to infrastructure development.   They are also creating an economic environment that encourages private sector investment – micro-economic reforms, institutional reforms, efficiency improvements – alongside a commitment to improved corporate and economic governance.  Further,  enabling legislation for effective public-private partnerships (PPPs) is also being introduced.   

These improvements might not be consistent across all of Africa’s nations, but they will certainly continue.  And this improving climate will increase the opportunities for private sector involvement in Africa’s infrastructure sectors.  
The pessimists say that Africa is too risky for investors.  Yet we know that no investment is without risk, in any part of the world.   Indeed, the belief that investing in Africa is a higher risk than in other regions is a myth.  A recent study by the ratings agency Moody’s, which analysed project finance loans in Africa over 20 years, found that only one of the 92 loans defaulted.
What about rates of return?  Africa is an emerging market, so returns are high for those who invest early.  Many privately financed infrastructure projects in Africa are seeing returns that compare well with other parts of the developing world.    

Africa’s infrastructure finance gap is the result of demand and real growth -- demand that comes from Africa’s recent solid growth.  Some countries in Africa have seen double-digit growth and  Africa is now one of the world’s fastest growing economies, with GDP growth rates that are often at par with China and Brazil.  That growth produces demand – for power, for water, for transport and for communications.  Projects in all of these areas are bankable.

Even the recent economic downturn has shown that Africa is not the economic basket case some would like to believe it is. Across Africa, real GDP grew by 5% from 2000 to 2008. Hitting a peak of $1.56 trillion in 2008, the financial crisis brought Africa’s collective GDP down to $1.4 trillion in 2009. The negative impact was therefore not as great as in other parts of the world.  Importantly, Africa’s growth is built on solid foundations and is rebounding. 2010 finished with growth at 4.5% and economists expect growth to reach 5% in 2011.  

Ultimately, it seems we, the optimists, have both the facts and the figures in our favour. If you are an investor, you can’t ignore Africa.  And you can’t ignore infrastructure.  You will want to back a winner.


Mr. Hassan is the Coordinator of the Infrastructure Consortium for Africa (ICA) Secretariat housed by the African Development Bank in Tunis, Tunisia. He holds an MBA in International Banking and Finance from the University of Birmingham in the United Kingdom and a Masters Degree in Economics from François Rabelais University in Tours, France. He has 18 years of experience as a Financial Analyst and Investment Officer in the infrastructure sector.


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