Coffee with Ayman Elsawy, CFO of Contact Financial Holding: Egypt’s debt market has matured at warp speed in recent years, and the domestic securitization market has hit its stride in 2022, with a stream of corporate issuances totaling some EGP 9.2 bn (by our count) hitting the market in 1Q — more than half what we saw throughout 2021. Newer types of debt are also gaining traction in the local market: CIB brought us our first corporate green bond issuance last year, while this March saw Palm Hills Developments (PHD) sell the first corporate sukuk of 2022 after a quiet few years.

Looking ahead, there’s plenty to be excited about — not least the chance that we could see our first future flow securitization, after President Abdel Fattah El Sisi last week ratified amendments to the Capital Markets Act that will allow the new product to come to market.

Leading some of the most significant debt issuances of late is Contact Financial Holding (formerly Sarwa Capital). Contact subsidiary Sarwa Capital managed and promoted PHD’s EGP 3.25 bn sukuk issuance, and is also hoping to become the first to bring a future flow securitization to market at some point in the second half of this year. We sat down for coffee with Contact CFO Ayman Elsawy (LinkedIn) to discuss what made the PHD issuance different, how future flow securitization could shake up the debt market, and what the financial services firm has planned for the rest of this year.

Edited excerpts from our conversation:

This week’s EGP 3.25 bn sukuk issuance for Palm Hills was a very unique transaction. It’s the first time an Egyptian developer has tapped the sukuk market for a project that has yet to be built. Most developers sell units in advance, and rely on the proceeds to fund project construction. This is not ideal, because it can cause issues related to the developer’s cashflow and ability to complete the construction process. But with these sukuk, we can raise money in advance of construction, accelerating the building process and mitigating risks.

After last week’s devaluation, most developers are facing cost overruns in their projects due to increases in the prices of raw materials. They’ve sold the units at a specific price, but on the construction side, prices increased. This will lower bottom lines or even lead to losses for some projects. But for sukuk-funded projects, the rate of return will be enhanced significantly, because the developer can offer built units, giving them flexibility on pricing. It also gives developers the flexibility to rent rather than sell units, which could help solve the problem of unsold units in our housing market.

We’re hoping to issue another EGP 5-6 bn in sukuk this year. Our next issuance will likely be for Wadi Degla Developments, hopefully in the second or third quarter of this year. We’re targeting an issuance size of around EGP 1.2-1.5 bn, to finance the developer’s Murano project in Ain Sokhna. ALC Alielden Weshahi & Partners are acting as legal advisors, and our strategic partner Misr Capital is working with us on the issuance.

We’re in talks with the Financial Regulatory Authority to launch a future flow securitization now that the legal framework is in place. We hope to make an issuance for one of the largest corporate firms in Egypt in the second half of 2022. We’re lucky to have the support of the FRA to introduce this product. There needs to be a market first, and then we can further regulate it.

There’s a huge potential market for future flow securitization, with opportunities in both the corporate and government sector. It’s simply discounting cashflow on expected revenues, and using the discounted cashflow to expand. It’s a very useful way for anyone who has a solid cashflow stream to raise capex funding. Future revenues from flight tickets, school and university fees, hospital fees, club memberships, renewable energy, utility bills, and more could all be securitized. Say a school provider wants to expand and build a new premises, they can use the discounted cashflow to do so. The Finance Ministry could even consider securitizing tax revenues. It’s a new idea, so we need to educate businesses about the potential benefits.

I believe this year is still the right time to introduce future flow securitization to the local market despite current global challenges. I can see the demand, and I don’t see any reason to wait. The macroeconomics is going well, and the problems we’re facing are a one-off issue. There’s demand from the corporate side and investors have a lot of liquidity. We can also structure future flow issuances in flexible ways to mitigate risk and cashflow volatility.

Recent crises like the pandemic actually help us make better predictions when it comes to structuring future flow issuances. We have a lot of experience now about what can happen in a crisis, allowing us to forecast cashflow volatility across sectors and companies.

For now, we’re targeting products like sukuk and securitizations at sophisticated local investors, but we’re looking to expand. Given the current circumstances, there’s been a bit of a delay, but once we have a stable market I think the GCC in particular will be interested in investing in Egyptian sukuk.

Our longer-term target is to offer these kinds of debt instruments to retail investors. We need to activate the secondary market as soon as possible, because I can see the demand. Sukuk and some kinds of funds are especially attractive because they’re sharia-compliant. Our challenge now is to create a market mechanism and demand to offer products like sukuk to retail investors, and I believe we’ll see this soon. Once there’s a secondary market for these instruments, I think it will encourage a lot of issuances. Accessing the retail market could be a game changer.

In terms of future trends in debt, we’re excited about moveable assets, money market and other types of funds. We’re hoping to soon launch a movable assets fund after clearing some final points with the FRA. [Editor’s note: Movable assets funds provide liquidity to businesses by using assets such as accounts receivables, inventories, and machinery as collateral. Unlike securitization, this doesn’t require issuing bonds or the setup of a special purpose vehicle.] It’s a very interesting tool for non-bank financial institutions, and a very lucrative product for the retail market. We’re also focusing on money market funds — Contact’s ins. arm, Sarwa Life Ins., successfully launched one in February last year. I believe such funds will solve the challenge of accessing retail investors directly.