Higher interest rates are driving private-sector companies to bank on corporate bonds as a financing mechanism. Securitisation and corporate have been gaining momentum since the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) increased interest rates by 100 basis points on March 21.
The International Monetary Fund defines securitisation as the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities.
The local companies are tipped to draw on corporate bonds as a broad, full-fledged funding instrument as the cost of bank loans has shot up since March. The stock market can offer numerous financing mechanisms for the country’s private sector. It can bridge the financing gap through the bond market.
Volume totaled LE447.2 billion (around $24.2 billion) in the first quarter (Q1) of 2022, compared to LE266.5 billion in 2021 Q1, data from the Egyptian Exchange showed. Bonds accounted for 85.55 per cent of volume in 2022 Q1, according to market data.
Securitised bonds totaled LE24 billion in 2020, according to data from the Financial Regulatory Authority (FRA). In 2021, FRA approved securitised bonds worth LE42.3 billion, of which LE18.8 billion were issued.
Why bonds?
Corporate bonds are an optimal instrument when firms seek expansion of operations, or need to fund new business ventures. According to PIMCO, Corporate bonds share several other vital characteristics, including: diversification, steady income, attractive yields, liquidity and ratings.
While some corporate bonds have redemption or call features that can affect the maturity date, most are loosely categorised into the following maturity ranges: short-term notes (with maturities of up to five years), medium-term notes (with maturities ranging between five and 12 years) and long-term bonds (with maturities greater than 12 years).
PIMCO classifies corporate bonds into two broad credit categories: investment-grade and speculative-grade (or high yield) bonds. Speculative-grade bonds are issued by companies perceived to have a lower level of credit quality compared to more highly rated, investment-grade, companies.
According to PIMCO, the investment-grade category has four rating grades while the speculative-grade category is comprised of six rating grades. New types of corporate debt instruments have evolved, i.e. high-risk (junk) bonds and mortgage- and other asset-backed securities.
Liberalised foreign exchange
The CBE devalued the pound on March 21 as part of measures to cushion the economic repercussions of the Russia-Ukraine conflict.
The bond market should be part of a comprehensive vision aimed at the creation of a developed derivatives market. A liberalised foreign exchange market is a boon for Egypt to start corporate debt issuance.
Moreover, an efficient bond market also requires the presence of a mechanism for adequate reorganisation in the case of default or bankruptcy. Bankruptcy is simply defined as a legal process by which “financially distressed” firms, individuals, and occasionally governments resolve their debts.
The parliament enacted a bankruptcy law for dealing with firms in financial distress. The law provides a collective framework for simultaneously resolving all debts when debtors’ assets are less than their liabilities. It sets priorities for the allocation of a firm’s assets in financial distress.
Discussion about this post