PM — How exactly future flow securitization works

Good afternoon, wonderful people, and welcome to another rather busy news day. Today’s news cycle is still dominated by business and economic news, but there’s also a sprinkle of diplomacy and policy to keep us on our toes.

THE BIG STORIES TODAY

#1- Egypt could export LNG to Poland: Egypt is “a partner of the future” for Poland as the European country looks to diversify its LNG imports, Polish President Andrzej Duda said following a meeting with President Abdel Fattah El Sisi in Cairo today. The two presidents discussed shipping liquefied natural gas from Egypt to Świnoujście, where Poland plans to expand an existing terminal, the Polish president said on Twitter.

Also on their radar: Getting wheat shipments out of Ukraine. El Sisi and Duda also discussed finding a way to export grain from the war-torn country of Ukraine to Egypt amidst the Russian blockade, according to the Polish press. Duda had said earlier this month that Poland could help facilitate shipments of Ukrainian wheat to Egypt through Polish seaports.

#2- The FRA wants to more than double EGX market cap by 2026: The Financial Regulatory Authority (FRA) wants to more than double the size of the EGX to EGP 1.6 tn from 2022 to 2026, the regulator said in its 2022-2026 strategy (pdf). The bourse’s current total market cap is currently hovering at around EGP 663.54 bn.

THE BIG STORY ABROAD

Brent crude prices breached the USD 120 per barrel mark as the EU prepares to sign off on a partial embargo on Russian oil imports. The European Council “agrees that the sixth package of sanctions against Russia will cover crude oil, as well as petroleum products, delivered from Russia into Member States, with a temporary exception for crude oil delivered by pipeline,” Reuters reports, citing a draft of the council’s conclusions. The story is also on the front page of the Financial Times and CNBC.

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** CATCH UP QUICK on the top stories from today’s EnterpriseAM:

• Abu Dhabi sovereign wealth fund ADQ will invest USD 10 bn in industrial projects in Egypt, the UAE and Jordan as part of a partnership signed in Abu Dhabi yesterday to finance large-scale projects in “key industries” that “create jobs, support growth, boost industrial production and increase exports.”
• The state plans to sell a stake in EGX-listed Egypt Aluminum (EgyptAlum) to a “strategic investor,” Public Enterprises Minister Hisham Tawfik said at a conference yesterday.
• It’s official: Eastern Company will acquire a quarter of Egypt’s second tobacco manufacturer after the company’s general assembly approved the EGP 100 mn purchase of a 24% stake in Philip Morris’ United Tobacco.

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FOR TOMORROW-

PSA- Tomorrow is the last day for EGX-listed companies to file their earnings for 1Q2022, after the Financial Regulatory Authority granted listed companies a two-week deadline extension.

Tomorrow is also the application deadline for ITIDA’s annual Export IT program. The program is designed to encourage local IT companies to boost exports while reducing related costs.

???? CIRCLE YOUR CALENDAR-

A handful of conferences happening this week:

• Egypt Can with Industry wraps tomorrow.
• The Islamic Development Bank’s 2022 annual meetings are scheduled for this Wednesday-Saturday, 1-4 June in Sharm El Sheikh. Enterprise will be attending the annual meetings and bringing you updates from there.
• The Islamic Corporation for the Ins. of Investment and Export Credit will hold two high-level parallel meetings on climate action and digital transformation during IsDB’s annual meetings.

The Greek Campus is holding a workshop this Wednesday, 1 June titled ‘Transitioning to E-Mobility’ which will look at the growing electric vehicle industry in Egypt and worldwide and why the shift to EVs is beneficial to everyone. The workshop will run from 6-9pm and will be led by local EV marketplace electrified co-founders Ayman Mohamed and Ahmed El Hosseny.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

☀️ TOMORROW’S WEATHER- Expect a daytime high of 39°C tomorrow and a nighttime low of 20°C in what seems like it may be the beginning of the summer heat, our favorite weather app tells us.

Egypt’s first Fashion Week is coming this fall: The Egyptian Fashion and Design Council (EFDC) held the pre-launch of the inaugural Egypt Fashion Week — scheduled for 3-5 November in Cairo — earlier this month at the historic Museum of Agriculture Cotton, where the event will take place this fall, according to a statement (pdf). The fashion week, which “blends a celebration of our civilization, a synopsis of our present and our vision for the future” under the theme “The Past, Present, and Future,” is set to feature the work of dozens of designers.

Are you an Egyptian designer who wants to participate? EFDC is accepting applications to Egypt Fashion Week until mid-September. Email info@the-efdc.com for the details and to apply.

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African vaccine production facilities struggle to remain commercially viable as demand fizzles out across the continent: In Africa, only 5% of the population has received a covid-19 booster shot and less than a third of the 60 mn population are double vaccinated, the Financial Times reports, citing WHO data. The figures reflect a lack of demand for vaccines from Africans which has led vaccine production facilities on the brink of closure, public health officials say. One of these facilities is South Africa’s Aspen Pharmacare, which signed an agreement to sell the Johnson and Johnson covid-19 vaccines. However, only six months later, the factory can’t find enough customers to continue operations.

Why aren’t Africans getting jabbed? Covid-19 hasn’t wrought as much havoc as it has in other places, with Africa accounting for only 8.3% of the world’s 14.9 mn deaths from the virus, according to WHO figures. Epidemiologists suggest that the low death rate could be due to Africa having the most young people across the world, with a median age of 19.7 versus 42.5 in Europe.

This doesn’t fare very well for the future: Getting vaccine manufacturing up to par was important at the height of the pandemic, but continuing the industry’s development is also essential to fight back against future diseases. The lack of vaccinations across the continent could also mean Africa could continue to experience the spread of covid and give rise to more variants after the virus becomes endemic elsewhere.

How are Egypt’s facilities doing? We haven’t heard much about Egypt’s local vaccine production facilities in a while, with the latest being the Egyptian Medicines Authority receiving accreditation from the World Health Organization for its locally-made vaccines back in April. The accreditation makes it easier for Egypt to export locally-made vaccines, such as the Chinese Sinovac shot with the country also planning to eventually produce an mRNA derivative.

???? ON THE TUBE TONIGHT-
(all times CLT)

Jackass is back with bonus content: Jackass 4.5 landed on Netflix recently, featuring deleted gags and stunts as well as behind the scenes footage from the previous movies, especially the fourth film Jackass Forever. Like the previous Jackass in-between films, it runs about 90 minutes and takes viewers through sit-down interviews that explain Forever’s gags in detail and tells the story of the crew’s reunion after many years. This time, the crew gets real about the pitfalls of trying to live recklessly some 20 years on from the original film and how it was challenging to film during covid-19. Nonetheless, the Jackass crew couldn’t pass up the chance to take on some explosive corona-centric pranks.

⚽ Al Ahly are hoping to make history in tonight’s CAF Champions League Final tonight, with the aim of becoming the first to achieve a hat-trick of straight Champions League crowns. Al Ahly will play against Morocco’s Wydad at 9pm at the Mohammed V Stadium — a decision that the Egyptian side opposed as it’s Wydad’s home venue.

Meanwhile, the National Bank and Ceramica Cleopatra will play today in the local league at 6:30pm.

???? OUT AND ABOUT-
(all times CLT)

Listen to your favorite pop, funk and disco tracks live with Ria at The Room New Cairo tonight at 9pm.

ArtTalks is holding an exhibition by the late artist Omar El Nagdi starting tomorrow at 6pm called The Phoenix Rises. El Nagdi was an abstract expressionist and cubist painter whose work was showcased next to Pablo Picasso and Salvador Dalí. “He is considered one of the most celebrated contemporary Egyptian artists with a multifaceted master of calligraphy, expressionism, abstract art, and philosophy,” the description writes.

???? UNDER THE LAMPLIGHT-

The Infinite Game emphasizes the importance of adopting an infinite mindset in playing the long game for your business: Business is an endless game and a series of constantly evolving challenges and author Simon Sinek creates a manifesto of how to operate with no permanent endpoint. The book explores topics such as team trust, the role of rivals in professional development, and how to be flexible while also ingraining a culture of innovation and dedication. The Infinite Game is a great read for business leaders who are learning to plan for the long term and Sinek uses easy-to-read and enjoyable prose filled with personal stories and humorous anecdotes that will keep readers engrossed.

EARNINGS WATCH-

Prime Holding’s bottom-line losses widened further in 1Q2022 to EGP 17.5 mn compared to EGP 11.4 mn in 1Q2021, according to an earnings release (pdf). Revenues fell 38% in 1Q2022 to EGP 20.1 mn.

GlaxoSmithKline saw its bottom line soar 449.3% y-o-y in 2021 to EGP 154.63 mn, according to the pharma company’s financials (pdf). Sales dipped 9.1% y-o-y to EGP 1.8 bn.

Beltone Financial’s net income rose 0.8% y-o-y to EGP 3.84 mn in 1Q2022, according to the firm’s financial statement (pdf). Revenues for the quarter rose 9.5% y-o-y to EGP 107.26 mn.

EGBank posted EGP 197.41 mn in net incoming 1Q2022, rising 23.7% y-o-y, according to its financials (pdf). Interest income rose 2.5% to EGP EGP 678.47 mn.

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MARKET ROUNDUP-

The EGX30 rose 0.2% at today’s close on turnover of EGP 724 mn (13.2% below the 90-day average). Local investors were net buyers. The index is down 15.4% YTD.

In the green: Madinet Nasr Housing (+3.5%), TMG Holding (+3.3%) and AMOC (+2.5%).

In the red: E-finance (-1.8%), EFG Hermes (-1.5%) and Ibnsina Pharma (-1.0%).

Enterprise Explains: Future flow securitization. Earlier this year, the Financial Regulatory Authority (FRA) proposed amendments to the Capital Markets Act that would allow service providers, both public and private, to raise capital by selling securitized bonds to investors after pooling together so-called “future flows.” This would mean those companies would have the option to borrow by promising to pay back using money they can reasonably expect to make at a future date. For service providers, those flows can be regular, fixed sums they get from subscribers, tolls, tenants, members, or any other clients they serve.

Haven’t companies already been doing this? Not quite. The previous legislative framework (pdf) only allowed for securitized bonds backed by existing accounts receivables. In accounting terms, this means those receivables need to have been logged in as “current assets” on the debtor’s balance sheet. Current assets include liquidity or any assets that can be sold or consumed — and turned into money — within one year.

Companies that issue and sell those traditional, receivables-backed bonds are typically real estate developers, who have large on-balance sheet notes and accounts receivables from selling homes on-installments (as well as physical assets to book as collateral), and finance providers, whose balance sheets are also laden with current assets in the form of loan principal and interest payments coming due. Generally, this process is known as asset-backed securitization (ABS).

How future flow securitization is different: The newly-introduced financing tool involves creating bonds with a promise to create assets in the future. Things like phone and utility bill payments, sporting club membership fees, rent, and toll gate payments — all of which can typically be predicted and are more or less consistent flows — would all qualify as “future flow” sources under this new instrument.

Future flow securitization could offer a cheaper alternative to expensive bank loans, as securitized bonds generally have lower interest rates than non-securitized bonds. It will also give companies that had previously struggled to secure growth capital access to immediate funds, and allow many businesses to ramp up capital expenditure even if they don’t have a large portfolio of current assets or receivables.

Like other debt instruments, future flow bonds will need a credit rating that determines whether or not they’re investment-grade. We’re still not sure how it would work, but the securitization process itself, by pooling together different assets, generally results in a rating higher than unsecuritized sovereign and corporate debt, which offer no physical collateral in the event everything goes bust. In future flow securitization, the assets used to create the bond haven’t yet originated, which could make risk rating a little trickier and more industry-specific.

Who can use future flow securitization? The proposal under consideration singles out companies that provide basic amenities and utilities to the public as key beneficiaries. Those include water, electricity, gas, energy companies, and waste companies or any company “that manages a public facility,” FRA boss Mohamed Omran said. But this doesn’t mean that future flow securitization will only be limited to utility companies as the proposal uses a broad definition for companies that would be eligible from the get-go to include all those that provide ongoing services to the public.

We could soon see our first future flow securities issuance, courtesy of CIRA: The EGX-listed private sector education outfit is in talks with the Financial Regulatory Authority (FRA) to issue EGP 1.5 bn worth of future flow securities, a source with first-hand knowledge of the transaction told Enterprise earlier this month. The company could take the issuance, which will be backed by receivables from its educational services, within four months. Contact Financial Holding is also in the running to be the first in the country to securitize future flows on behalf of “one of the largest corporate firms in Egypt,” CFO Ayman Elsawy told us earlier this year. The company is expected to issue the securities in 2H 2022, he said.

The origins: The first future flow transaction (pdf) was in 1987 by Mexican phone company Telmex, when it packaged and securitized payments it was owed from AT&T for calls made to Mexico from the US. The transaction wasn’t considered particularly risky as demand for those calls wasn’t expected to drop anytime in the future. Since then, the instrument has been touted as an innovative financing solution in developing countries, particularly because it can help credit-worthy public and private sector companies in those nations obtain ratings higher than their governments, because a borrower in future flow securitization typically has access to legally binding consent from its clients that they will make payments.

Dive deeper:

• IDB Invest has a handy primer that appears to be geared towards companies.
• Scholars Suhas Ketkar and Dilip Ratha wrote extensively about the concept in a research paper published by the IMF and the World Bank (pdf), touting the instrument as useful for developing countries.”