DLM Emphasizes the Importance of Securitization to Investing in Africa


Tuesday, September 29, 2020 / 12:50PM / DLM Capital Group/Header Image Credit: DLM Capital Group

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DLM Advisory Limited, a leading player in the investment banking industry in Nigeria and a member of the DLM Capital Group, has emphasized the importance of securitization to the economic development and growth of Africa. This was made known in a presentation at a webinar tagged "Securitization in Africa" which was organized by the Milken Institute.


Speaking at the webinar, DLM Advisory Limited, represented by the Group CEO of DLM Capital Group, Mr. Sonnie B. Ayere, who was a panelist gave a presentation on "Accelerating Securitization in Africa and its benefits to Investors in Nigeria."


He highlighted some securitization transactions in the Nigeria's Debt Capital Markets and gave an example of one of the earliest notable securitization transactions, which was the 2007 FMBN Residential Mortgage Backed Securities N100bn RMBS Program - Series 1, 2 & 3 bond issuances with a combined size of N56.564 billion all bought by banks and some real money managers. Another notable transaction was the N400bn NMRC Residential Pass-Through Bond Program in 2015, which was structured as a pass-through bond with the benefit of a Federal Government Guarantee.


Mr. Ayere noted that another form of securitization in the Nigerian Debt Capital Markets was the N20bn Asset Backed Commercial Paper Program, in 2017 by Mortgage Warehouse Funding Limited (MWFL). The CP Program provides short term liquidity by prefinancing Eligible Mortgage Loans ("EMLs") originated by MWFL's member mortgage Banks and qualifying mortgage lending institutions.


During the Webinar Series, he highlighted the role of DLM Advisory Limited (DLMA) in structuring these transactions. He said, "We act as the arranger, financial adviser and issuing house and DLMA Advisory Limited (DLMA) also registers, distributes and sell the securities on behalf of our clients to real money managers".


On the benefits of securitization to current and prospective investors in Nigeria, he said it transforms expected risks into different possible outcomes to suit different investor risk appetites, connects the capital market to the consumer market and provides investors with increased diversification in terms of asset classes.


"As an investor, if you fund one loan, and the borrower defaults, you might not recoup all your principal in a forced sale situation and end up taking a 20% or more cut in principal returned, if you price your lending rate to offset that one time risk, you will be priced out of the market. In other words, the interest rate will be too high and therefore the product will not work. But, if you know that only 0.5% out of a thousand mortgages will default (assuming a pool of similar debtors neutralize variances in credit profiles), you can price the loans at market acceptable rates that are sufficient to make up and cover for the aggregate expected losses and still make a spread; and this remains one of the greatest benefits investors stand to gain through securitization".


Also adding, he said securitization structures allows the lender to calibrate the credit enhancements to offset expected risks, which improves the overall credit rating.


"So a single mortgage may be considered a non-investment grade rating (below BBB) due to the risk of  default and the loss severity were the default to occur; however, a diversified pool might be considered A- since, the risk probability is now only 0.5% and so, a credit enhanced pool can now be structured to the AAA level, this is accomplished by covering not only the expected losses but, also losses in a severely stressed scenario".


On future flow securitizations, Mr. Ayere pointed out that the only two successful future flow transactions in Nigeria was handled by DLMA and stated that it has a relatively short in history in the Country. He added that the execution of a future flow securitization provides a business with the capital needed to accelerate growth and significantly scale up since the repayment happens over the longer term, and is based on expected future cash flows.


He went on to mention that the first successful future flow securitisation transaction in Nigeria occurred in 2017 with the securitization of the Combined Expatriate Residence Permit and Alien Card (CERPAC) receivables due to Continental Transfert Technique Limited; this was a N25 Billion issuance program that was led, structured and arranged by DLM Advisory Limited.


The second future flow securitisation transaction in Nigeria, also led by DLMA, was for Primero Transport Services Limited (PTSL), which involved the listing of a ₦16.5 billion BRT tickets receivables securitization. A N100billion medium term bond programme was arranged and coordinated by DLM Advisory Ltd. The future flow securitization allowed Primero to monetize its existing and predictable cash flows from ticket sales receivables, recovered during the business.


Following the successful issuance of the Primero BRT Securitization SPV Plc Series 1 note, the value of future flow securitized transactions in the Nigerian debt capital markets stands at N33.06billion".


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