Introduction

Micro, small and medium-sized enterprises have witnessed exponential growth in Egyptian markets and have entered various sectors ranging from telecom and healthcare to education. Such expansion has warranted the attention of State legislative bodies, namely the Financial Regulatory Authority (the “FRA”), who worked towards developing the regulations governing the capital markets field. A milestone in this regard was the introduction of the concept of securitization of expected future cash flow receivables (the “Future Cash Flow Securitization”) under Law no. 13 of 2022, issued on 13 March 2022 (the “Law”). According to the Law, securitization companies can now issue tradable bonds whose yields shall be used to fund public and/or private legal entities in exchange for future cash flows. In other words, securitization companies could now issue debt instruments whose repayment of the principal and interest is secured by payments on future cash flow receivables. The concept aims at facilitating the access of companies that do not necessarily have a substantial portfolio of account receivables to liquidity by providing an alternative funding source other than banks or non-banking financial institutions.

To this end, the FRA issued Decree no. 115 of 2022, issued on 27 September 2022 (the “Decree”), regulating the issuance of bonds against expected future cash flow receivables.

Overview of the Article

This Article briefly sheds light on the differences between traditional securitization and Future Cash Flow Securitization while outlining the latter’s conditions. It also touches upon our take on the importance of Future Cash Flow Securitization in developing countries.

Securitization

Securitization companies are mainly regulated by the Capital Market Law no. 95 of 1992 and its Executive Regulations. These are companies which are active in the issuance of negotiable bonds based on available and palpable guarantees.

Securitization Versus Future Cash Flow Securitization

• While securitization is typically asset-backed, Future Cash Flow Securitization involves collateralizing on the accounts receivable provided under balance sheets and aims to securitize payments which do not yet exist under companies’ balance sheets.
• While securitization requires an extensive portfolio of accounts receivables, Future Cash Flow Securitization grants do not require the existence of the same.

Conditions Governing Future Flow Securitization

The Law and the Decree set out certain obligations and conditions that should be observed for the purpose of undertaking Future Cash Flow securitization. These include, inter alia, the following:

1. Conditions for Bond Issuance:
   Certain conditions apply to the issuance of the aforementioned bonds by securitization companies. Said issuance is subject to the prior approval of the competent authority and must be made against future cash flows, which shall be collected into the account of the originator within the ordinary course of business. These future cash flows must be (i) created for the benefit of public or private legal entities; (ii) not restricted or conditioned; and (iii) free of third-party rights.
2. Originator Obligations:
   The originator must prepare an audited study covering- inter alia – past revenues achieved by the project (if any) and expected future cash flows during the bond issuance. Such a study must also cover the portion of the flows assigned to the securitization company.Further, the originator must comply with the following when issuing the bonds:
   1. Obtain a credit rating of not less than (BBB-) from a duly licensed institution. Such rating must be renewed annually during the issuance period;
   2. Disclose, in the subscription prospectus or the issuance information memorandum, the summary of the financial statements and financial data prepared per the Egyptian Accounting Standards for the three years preceding the issuance or since incorporation (as applicable).
   3. The auditor’s report should be annexed to the same as well; and
   4. Submit a statement reflecting the current net value of future cash flows, the basis of their evaluation, and the additional guarantees (if any) ratified by the auditor of the originator.
3. Securitization Company Obligations:
   The Decree provides for a set of minimum documents which the securitization company should submit to the custodian as part of the securitization process, including – inter alia- approval of the FRA for the issuance of the bonds.The Decree also provides that the securitization company must enter into a number of agreements, including – inter alia - an assignment agreement with the originator.A collection agreement must also be entered between the originator (being a collector) and the securitization company or the party with whom it was agreed to collect future cash flows (if any), provided that it includes the assignment to transfer the proceeds to the custodian immediately upon collection.

   The Decree also regulates the custodian’s obligations regarding the securitization of future receivables process.

Our take

Future Cash Flow Securitization is a concrete move towards the realization of economic and constitutional principles and goals, namely:

• Investment encouragement;
• Balanced growth on geographical and sectorial levels;
• Market-tools regulation; and
• Balancing interests of involved parties.

Future Cash Flow Securitization will help enlarge the securitization market in Egypt during the following years. A larger number of companies – previously not legible for traditional securitization - will be able to enter the securitization market and sell future cash flows to investors.

However, it is not without its risks. There are mainly two risks concerning the Future Cash Flow Securitization:

• Performance risk where the key performance indicators of the originator are not duly met, negatively affecting the expected receivables based on which financing was granted under Future Cash Flow Securitization.
• Bankruptcy risk where the originator may become insolvent or otherwise fail to perform; and, accordingly, fail to generate the expected receivables.