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Securitisations and market confidence: keeping with the times in Nigeria

Banji Adenusi
In February 2013, the Nigerian Securities and Exchange Commission (SEC) announced plans to introduce asset-backed securities to the capital market, primarily as a way to further deepen the market, and to provide long term financing for key areas of the economy such as agriculture, infrastructure, and mortgage markets. Despite the fact that the issuance of securitisations has slumped in recent years – world markets, especially the United States and Europe, are becoming more dependent on government support and central banks – it is a welcome development that will hold exciting prospects for investors, as it affords the opportunity to gain direct risk exposure to diversified sectors of the economy. From the standpoint of the originator, apart from the obvious advantage of diversification of funding sources and off-balance sheet accounting (in some instances), the biggest incentive for securitisation lies in the ability of the originator to transfer the risk of the recovery of the receivables to the investor.

Given the uncertainty that trails structured finance products in most developed markets, especially the regulatory framework, it will be interesting to observe SEC's approach in the regulation of securitisations, and whether the major issues affecting its regulation in Europe and the United States will also be encountered in Nigeria. Essentially, the greater concern relates to risk retention, where in both the United States and Europe (under the Frank Dodd Act and the Basel II framework respectively) the requirement is to have the originator retain a material net economic interest of 5% loss on the transaction on an ongoing basis (known as the 5% first loss position), which will invariably lead to greater administrative and capital costs for originators, and a greater burden of due diligence on both investors and originators.

To facilitate the development of the securitisation market, regulations are required to eliminate or reduce a number of legal and tax challenges to issuance, such as bankruptcy and property ownership. The main challenge however, apart from the structural framework, is the development of an investor base, especially as a large number of investment bankers are required in developing an equally large naira-denominated investor base to absorb the naira-denominated supply. With regard to the investment climate, a more common form of securitisation may well be residential mortgage-backed securities (RMBS), as securitisation will likely be dependent on the federal mortgage agency. In 2012, an originator, FMBN SPV Issuer, issued N24.564 billion ($153 million) zero coupon notes by way of private placement under the N100 billion RMBS programme of the Federal Mortgage Bank of Nigeria. The Series 3 Fixed Rate Note was guaranteed by the Federal Government and sponsored by the Federal Mortgage Bank of Nigeria. It is therefore conceivable that RMBS will dominate the forms of securitisations in the capital market, with the attendant effect of crowding out private-label issuance in the short term.

SEC's endorsement of securitisations is an acknowledgement of their importance as a tool for capital-raising and means of transferring risk. It also highlights the challenge of creating a robust regulatory framework in attending to the complexities of this form of financing and governing the activities of financial institutions. In a credit-risk sensitive environment, investors are constantly seeking higher yields than most deal structures can provide; consequently, SEC's push for structured financing products and a secure regulatory framework cannot have come at a better time.

Banji Adenusi

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