On February 2023 we all heard about the 638 million EGP securitized bond Palm Hills Developments issued with EFG Holding ( Hermes ) as the financial advisor of the sale. The security was issued on three tranches with tenors of 13,36, and 84 months with credit rating ranges from AA+ and A ( from excellent to poor )rated by Middle East Rating & Investors Service (MERIS). National Bank of Egypt (NBE) and Banque du Caire acted as underwriters while Al Baraka Bank Egypt acted as the subscriber of the process. The custodian role was played by Banque Misr . Lastly, ALC- Alieldean Weshahi & Partners Weshahi & Partners) acted as legal advisor while KPMG acted as the auditor.
In this article we will discuss the various roles and entities involved in the securitization process
Securitization Process: Key Roles and Entities
As we have seen above that many financial and legal entities participate in the securitization process, why do they do that, and what roles do they play? That is what we are going to know next.
Firstly, we have the Originator: The originator (represented by Palm Hills Development Company) is the entity that originates the underlying assets, such as mortgage loans or real estate assets, that will be securitized. It can be a bank, mortgage lender, or other financial institution. The asset in this example was the huge amount of receivables resulting from the company’s units sold with different payment plans
Sponsor: The sponsor is the entity that initiates the securitization transaction and takes responsibility for assembling the pool of assets, structuring the securitization, and ensuring compliance with legal and regulatory requirements.
Underwriter: The underwriter, National Bank of Egypt and Banque Du Caire in our mentioned example, are typically investment banks or financial institutions, they play a crucial role in the securitization process. The underwriter helps structure the securities, assess the credit risk associated with the securitized assets, determine pricing, and facilitate the sale of the securities to investors.
Rating Agencies: Rating agencies, such as Middle East Rating & Investors Service (MERIS), Standard & Poor's, Moody's, or Fitch Ratings, provide independent assessments of the credit quality and risk associated with securitized securities. They assign ratings to the securities based on their evaluation of the underlying assets and the securitization structure.
Trustee/Custodian: The trustee or custodian, Banque Misr, is a third-party entity responsible for safeguarding the underlying assets and ensuring compliance with the terms and conditions of securitization. They hold the assets on behalf of investors and monitor the cash flows from the underlying assets to distribute payments to investors.
Special Purpose Vehicle (SPV): The SPV is a legal entity created specifically for the purpose of holding securitized assets and issuing securities. It isolates the securitized assets from the originator's balance sheet and provides bankruptcy remoteness, protecting investors from potential risks associated with the originator.
Servicer: The servicer is responsible for collecting borrower payments, managing escrow accounts, and handling the ongoing administration of the underlying assets. They ensure that the cash flows from the assets are accurately calculated and distributed to the investors in accordance with the securitization structure.
Legal Counsel: Legal counsel, including law firms specializing in securitization, provides advice and guidance throughout the securitization process. They ensure compliance with legal and regulatory requirements, draft necessary documentation, and handle any legal aspects associated with the securitization transaction.
Investors: Investors are the entities or individuals who purchase the securitized securities, providing the necessary funding to the securitization process. They can include institutional investors, such as pension funds, insurance companies, or asset managers, as well as individual investors.
These roles work together to facilitate the securitization process, ensuring compliance, risk assessment, structuring, distribution, and ongoing administration of securitized bonds. It's important to note that the specific roles and entities involved may vary depending on the jurisdiction, the type of assets being securitized, and the complexity of the securitization transaction.
With many risk-free investment options offered on the table nowadays, will you think about investing in a securitized bond and gain higher interest or you will prefer sticking to the normal investment tools we all are used to from TDs to CDs?
