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Sunday, 19 March 2023

With equity fundraising flowing to a crawl, are more mature startups eyeing securitized bonds?

Securitization could become the next big thing in startup funding: Egypt’s startups and younger companies began shifting towards alternative investment vehicles last year, trumping the equity card with instruments like debt to avoid further share dilution. In the fintech space, we’ve heard of two young companies issuing securitized bonds in the past few months, suggesting that bond issuances could be gaining traction in StartupLand.

Blnk and MNT-Halan are two startups that have recently turned to securitization: Lending platform Blnk raised a total of USD 32 mn in equity and debt capital in November, of which USD 8.3 mn were a securitized bond issuance underwritten by Banque du Caire and the National Bank of Egypt. Egyptian superapp MNT-Halan also took two bond issuances worth USD 140 mn to market through its subsidiaries Tasaheel Microfinance Company and Halan Consumer Finance early February. This was the company’s second issuance, with the first one completed in June last year for USD 150 mn.

Both Blnk and MNT-Halan are lenders, which means they can securitize their loan books. As lenders, Blnk and MNT-Halan have a pool of receivables that they’re expecting to get in the short, medium, and long term. These receivables were restructured as a bond, and rated by local rating agency MERIS. After a due diligence process by an auditor and a law firm, this pool of underlying receivables can be sold to fixed-income investors, which are predominantly banks, ins. companies, and fund managers.

But why opt for securitized bonds?

#1- Fast growth means more cash burn: “You’re basically moving your loan book from your balance sheet to someone else’s balance sheet to raise money to keep growing,” MNT-Halan founder and CEO Mounir Nakhla told Enterprise. Companies opt for securitized bonds because they can offer more liquidity by offloading receivables. “We’re growing faster than our ability to secure debt from local commercial banks, and to compensate for that, as well as demonstrate our ability to de-bottleneck our balance sheet, we pursued the securitization at a very early stage,” Blnk co-founder and CEO Amr Sultan tells us.

#2- And there’s no cap on the amount of money you can raise, as opposed to traditional debt. “Getting traditional forms of debt comes with a cap, but securitized bonds allow us to raise bigger amounts than traditional overdraft facilities,” Nakhla adds.

#3- Moving away from foreign currency and share dilution: When it comes to equity funding — the usual suspect in the startup funding space — entrepreneurs get a bit wary due to two things. Firstly, every investor that comes on dilutes not only the founders’ shares, but also those of the company’s other investors. Secondly, “a lot of the equity funding is in USD and I definitely do not want any USD exposure to grow my loan book, but rather local currency exposure,” Nakhla explains.

Caveat: The process is tedious and time-consuming: The founders used words like “complicated,” “tedious,” and “thorough” to describe the securitization process. “The first securitization was very complex and took at least six months to go through,” Nakhla says. This goes back to the meticulous due diligence process taking place between auditors, lawyers and government bodies. “The subsequent ones were more straightforward. There is a learning curve,” he adds.

But that’s also not necessarily a bad thing: The complex process makes it a safer option for investors. “Given the level of scrutiny we are subjected to in the securitization process, it gives fixed income investors a level of comfort in the soundness of the company and its business,” Sultan explains. Banks — a few of which might be averse to lending a young company — as well as other fixed income investors, are more likely to invest in a highly rated securitized bond, which is why this type of funding opens up the possibility of having multiple sources of funding that can grow concurrently, he adds.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

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