Could My Company Raise Capital Through Securitisation in Kenya?

A company can raise capital through securitisation in Kenya only if it fits the class of eligible originators in the Capital Markets (Asset-Backed Securities) Regulations, 2007 (Legal Notice 184 of 2007), and only if its assets pass the tests in regulations 35 and 36. Under regulation 4, the originator must be a public company, a statutory corporation, local authority or Government Ministry, or an entity established in Kenya under a written law, unless the Capital Markets Authority approves another kind of entity. A private company with a large receivables book should therefore expect to need that approval, or to look at a different funding route. The legal framework is complete on paper. The practical question is whether your business and your assets fit inside it.

How a Kenyan securitisation is structured

The Regulations apply to offers of asset-backed securities to the public or a section of it, including issues by state corporations and other public bodies (regulation 2). They are made under the Capital Markets Act, and section 30Z of that Act lets the Capital Markets Authority issue guidelines on securitisation, including the application for approval, the form of the special purpose vehicle and its documentation requirements. Section 12A separately empowers the Authority to issue guidelines and notices on capital markets products generally.

The structure has four moving parts. The originator transfers assets to an issuer. The issuer, under regulation 6, must be a company incorporated under the Companies Act (or another form the Authority approves) and, unless the Authority approves otherwise, must be a newly created entity with no pre-existing creditors other than for formation expenses. At least one third of its directors must be independent. Regulation 8 adds that the issuer and its securities must not be marketed as a subsidiary or group company of the originator, and the names used must not imply any relation to the originator.

The issuer must appoint a trustee for the security holders (regulation 23), whose job is to enforce the holders’ rights against the issuer, any credit enhancer and others with recourse obligations. It must also appoint a servicing agent. Under regulation 14 the servicing agent must be independent of the issuer but may be the originator, provided it provides the services at arm’s length and on market terms. The originator must appoint an advisor from among licensed investment banks, stock brokers and investment advisors, who liaises with the Authority (regulation 25). An originator may buy no more than ten percent in cumulative value of the securities issued from its own assets unless the Authority permits otherwise, and that cap does not apply to subordinated securities it holds (regulation 5).

Which assets qualify for securitisation in Kenya

The Regulations do not list asset classes. They define eligible assets only as the assets that are the subject matter of the transaction, and then impose tests in regulation 35. The assets must be capable of generating a true and identifiable revenue stream projected to be sufficient to service the return of and return on the investment, plus allowable expenses, for the life of the securities. They must be free from encumbrances or impediments to free transfer, and their transfer must not trigger an event of default or acceleration under any security agreement over the originator’s assets. And they must be transferred at fair value.

Regulation 36 requires the originator to have and demonstrate an unencumbered right to transfer all legal and beneficial interests in the assets. Regulation 37 requires the originator to transfer all its rights, title, interests and obligations in the assets to the issuer and retain no beneficial interest or liability. Two narrow exceptions apply: the originator may keep a first right of refusal to repurchase assets at fair value once they have declined to a level that makes the transaction uneconomical, and it may be required to repurchase assets if it breaches a condition, representation or warranty in the transaction.

For a company that has pledged its receivables to a bank, this is the first hurdle. The application must include written consent from any existing secured creditor agreeing to wholly discharge its security over the assets to be transferred (regulation 26(3)(b)). Receivables already caught by a debenture or a lender’s assignment cannot simply be moved into a vehicle.

The approval path and what the application must contain

An application to the Authority for approval to offer, issue or list asset-backed securities is made in the prescribed form (regulation 26). Among other things it must be accompanied by a term sheet, a board resolution of the originator approving the transfer of the assets, the constitutional documents of the originator and issuer, declarations from the originator, issuer and advisor, a legal opinion confirming that the transferred assets would not be available to the originator’s creditors, liquidators or receivers if it became insolvent, draft material contracts such as the servicing agreement and any credit enhancement agreement, a letter of no objection from the originator’s primary regulator where applicable, and a credit rating report from an independent credit rating agency.

Regulation 38 requires every securitisation transaction to be rated by an independent credit rating agency approved and registered by the Authority. Regulation 39 lets the issuer seek credit enhancement, for example over-collateralisation, a standby letter of credit, a guarantee, a surety bond or subordinated tranches; where a licensed bank, financial institution or insurer provides it, the prior written consent of the Central Bank or the Commissioner of Insurance is needed. The information memorandum and supporting material must reach the Authority at least 28 days before the offer opens, and the offer period must not exceed 30 days unless the Authority approves otherwise (regulations 28 and 29). Regulation 27 provides for the Cabinet Secretary to be informed of the Authority’s decision, and regulation 40 allows the securities to be listed on the fixed income segment of an approved securities exchange.

Is securitisation in Kenya the right route for your company?

Whether securitisation in Kenya suits you depends on facts the Regulations do not supply: whether the receivables pool is large and granular enough to justify rating, trustee, legal and advisory costs, and whether the originator can show clean title to every asset. Those are commercial and diligence questions, and a conventional bank facility, a bond, or a secured loan may meet the same need with less structure. If your goal is secured lending against receivables or movable assets, our articles on the security trustee in lending and movable property security rights cover routes that do not require a public offer.