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