By Nathaniel Solomon
In recent times, there has been an unending need to access more capital in even more innovative and creative approaches without incurring too much liability. Largely, capital can be raised by simply inviting the public to invest in the shares of the company and thereby becoming shareholders. Alternatively, the specific company can also reach out to financial houses to take credit for its activities. One of the most novel approaches today of raiding capital for companies is to pool liquid assets together and transform them into tradeable assets which can then be used to investors. This process is known as Securitization and it is optimally realized through the transforming machinery of a Special Purpose Vehicle (SPV).
Securitization is the process of turning assets into securities which involves an arrangement in which one party (the originator) sells a portfolio of assets to a special purpose vehicle (the issuer), who finances the purchase by packaging the cash flows from these assets as tradable financial instruments, which are sold to investors. The underlying assets used as securities for investors under securitization could either be Asset-backed- Securities (ABS) or Mortgage-backed Securities (MBS). Special Purpose Vehicle (SPV) is a legal entity such as a corporation, trust or partnership established for a specific and limited purpose. SPV does not have the right or ability to engage in any activities other than those rightly granted to it in the legal documents creating and governing the securitization transaction and the SPV. It is worthy of note that one of the essential features of an SPV is embedded in the principle of bankruptcy remoteness i.e., a securitization SPV is never threatened with potential bankruptcy. In other words, should the sponsoring company enter bankruptcy proceedings, the company’s creditors cannot seize the assets of the SPV.
An SPV has benefits that make it unique from other methods of raising capital. Since securitization helps to transform illiquid capital into liquid capital, it ensures fast capital liquidation by originating companies so that they can engage in other business as opposed to tying down capital for a long period. Securitization also accelerates cash receipts from the receivables while removing the receivables from the originator’s balance sheet. It provides off balance sheet financing as opposed to on-balances funding as in the case of book debt. Securitization fosters the growth of the economy, through the provision of additional ways of raising funds for business activities and provides a platform whereby the originator can transfer risk without selling off its assets. In securitization, investors are also protected against the credit risk exposures of the originating company as the true sale transfers all the risks and benefits of the assets in question to the SPV which is a distinct entity and bankruptcy remote.
The major legal/regulatory framework on securitization in Nigeria is the Securities and Exchange Commission’s (SEC) Rules on Securitization, 2015. Also worthy of note is the Asset Management Corporation of Nigeria Act, 2010 (the AMCON Act) 7 as amended which has a structure akin to asset securitization to rehabilitate distressed financial institutions. The SEC Rules refers to Securitization simply as the issuance of securities backed by a pool of assets and to SPV as a legal entity formed with the exclusive purpose of acquiring and holding certain assets for the sole benefit of noteholders in the Asset-backed securities, such that the noteholders have acquired nothing but undivided interests in the asset pool.
At DLM Capital Group, we function as a sole arranger to more than 80% of structured finance transactions in Nigeria, with 100% of all securitization transactions in the market currently. Till date, we have maintained a long-standing record as West Africa’s Best Securitization House. Irrefutably, Securitization has numerous benefits if well explored by companies in raising capital for their various needs. However, this option is not being explored by many companies in Nigeria majorly because they are not aware of its existence and process.
By Nathaniel Solomon, Investment Banker, DLM Capital Group