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Sunday, 21 February 2021

The debt market has been good to EFG Hermes Corp Solutions

Talal Elayat, CEO of EFG Hermes Corp-Solutions, on the firm's plans for the debt market: The non-banking financial services (NBFS) sector has done well despite pressure from the covid-19 pandemic, including the near shutdown of the market in the early days of corona and a holiday on repayments ordered by the regulator. A stress test (pdf) conducted last year by the Financial Regulatory Authority to gauge the sector’s resilience showed that institutions’ financial positions were “robust” and remained sufficiently liquid to cope with the effects of the pandemic.

One company that didn’t suffer from covid was EFG Hermes Corp-Solutions, whose leasing and factoring services saw a surge in demand over the 12-month period. We sat down with the company’s CEO, Talal Elayat, to find out more about how it has coped with the challenging conditions, the state of the NBFS sector, and its plans for the future.

Key takeaways:

  • 2020 was a strong year for Corp-Solutions;
  • Its total portfolio grew 55% and its factoring portfolio more than doubled;
  • It is planning to securitize EGP 500 mn of its portfolio later this year;
  • It wasn’t just banks investing in EFG’s latest issuance;
  • The company has kept bad loans below 1.6% of its portfolio despite the pandemic.

Edited excerpts of our conversation:

Corp-Solutions brushed off the pandemic in 2020: In mid-2020, EFG Hermes merged its leasing & factoring services under one entity, setting it up for a year in which it improved its market position despite the pandemic. EFG Hermes Corp-Solutions’ combined leasing and factoring portfolio reached EGP 6 bn by the end of 2020, jumping 55% y-o-y, with the majority (EGP 5.1 bn) coming from leasing, while factoring took EGP 800 mn.

And the company made its play for Egypt’s factoring market: The factoring business, which we launched in 2018, grew around 120% last year. The majority of the customers are with the leasing arm, but last year we started to build on our existing customer base and expand the factoring arm. (Factoring is where you sell a middleman your unpaid receivable, taking funding today but leaving some of it on the table for the middleman to make a margin. Sound complicated? We have your back in Enterprise Explains: Factoring.)

Corp-Solutions isn’t focused on a particular sector or client base: We aim to tap all sectors rather than prioritizing one over the other, but we are giving more attention to the industries driving the Egyptian economy. These include healthcare, education, construction, and fintech. As far as our client base goes, we’re pushing back our plans for increased targeting of SMEs — one of our goals since our inception — due to the pandemic and until the market stabilizes.

When life gives you lemons… The pandemic was full of uncertainties due to the partial lockdown of the economy, but it opened up potential mergers, acquisitions, and new investments. We’ve taken this time as a chance to support a large number of entities with their financing needs, resulting in more customers and an expansion of our loan book.

Central bank stimulus helped to support the NBFS sector through covid: The Central Bank of Egypt (CBE) certainly had a big hand in stabilizing the market last year with its monetary stimulus measures. Its debt relief initiative, which delayed loan repayments for individuals and businesses, and the interest rate cuts it enacted helped the market to grow.

How bad were NPLs thanks to covid? Corp-Solutions is closely monitoring its clients to align their plans and mitigate risks. As a result, the company’s non-performing loans (NPLs) did not exceed 1.6% of the overall portfolio in 2020. Looking ahead, we’re aiming to trim our NPLs by growing our portfolio, bolstering our client relationships by offering support and different solutions. All of this, however, is subject to market conditions stabilizing.

Elayat welcomes the prospect of lower rates: Further cuts would unlock capex borrowing and encourage companies in expansion. It would also improve competitiveness for local NBFS players due to the lower cost of borrowing.

Egypt’s debt securities market is booming: The securitization market saw significant growth in 2020 and will maintain this uptrend this year as players look to reduce exposure of their balance sheets and diversify their funding mix. Diversifying the investor base away from banks is also important for the development and liquidity of the debt capital market.

EFG Hermes is planning a EGP 500 mn issuance in 2H2020: Corp-Solutions is looking to tap capital markets once again following a successful first issuance a few years ago. We're looking at an issuance worth EGP 500 mn as part of a larger program in 2H2020. But it won’t be limited to the sale of receivables.

Bringing retail investors into the securitized bond market: Diversifying the investor base away from banks is important for the development and liquidity of the debt capital market. The recent securitized bond issuance led by EFG Hermes on behalf of Hermes Securities Brokerage (HSB) saw participation from a diverse base of retail investors including high net worth individuals and corporates. With the Financial Regulatory Authority (FRA) and the CBE pushing to enhance the market and the funding mix, the company hopes to see more retail investors participating in the market in the near future.

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