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ALC Titrisation

ALC Titrisation obtained authorisation to manage private SPVs totalling 86.4 billion FCFA from the local regulator, the Conseil Régional de l’Epargne Publique et des Marchés Financiers (CREPMF).
  • Regulation n° 02/2010/CM/ WAEMU for Special Purpose Vehicles and securitisation transactions in the WAEMU zone
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  • Instruction No. 43 – -2010 related to the authorisation of securitisation mutual funds, information notes. and the terms and conditions related to investing in securities on the financial market
    Download the file
  • Instruction No. 44-2010 related to the authorisation of management companies of special purpose vehicles in financial markets in the WAEMU zone
    Download the file

A

ABS (Asset-backed Securities)

Generic term used for debt securities issued as part of a securitisation transaction.

Amortization

Process by which the principal amount of a liability is progressively reduced over time. Asset-backed securities (ABSs) which, in addition to paying interest, reimburse investors for an amount of the principal of the bonds issued; this is known as the “depreciable” amount. Depreciation often differs from an “in-fine” repayment in which repayment of the entire principal is made at maturity. Normal depreciation differs from early prepayment, which is associated with the repayment of the principal prior to its scheduled settlement date.

Assignor

Company or public entity (Treasury Department, municipality, public company), which assigns the debts to the securisation vehicle.

Auditor

Auditors perform annual audits on the SPV management company and play a fiscal consulting role on the financial package.

C

Cash Flow Waterfall

Rules defining the allocation of cash flows in the SPV. Generally, once all the fees have been paid, the remaining sums are allocated to different holders of all the securities issued in the framework of a transaction. These rules are defined prior to issuing the debt securities.

Collection agency

Entity responsible for monitoring receivables, collecting financial flows from receivables, and implementing the steps necessary to recover them in the event that they are unpaid or defaulting. Generally, the Assignor performs this role.

Credit enhancement

Improving the level of security of issued securities. It can be interior (overcollateralisation, issuing senior or subordinate securities) or exterior (liquidity lines, guarantees).

Credit risk

Risk that a lender will not be reimbursed or will be reimbursed for a lower amount, or that it will be repaid over a longer period of time than originally agreed.

D

Debt holder

Physical person or company that holds a debt.

Debtor

Company or person in debt. In the case of mortgage-backed securities, the debtor is the physical person to whom the mortgage has been granted.

Debt security

Unit or bond issued by the SPV in order to collect the funds necessary to acquire the receivables. The financial flows of the debt securities are backed by those originating from the receivables.

Default

Failure by a party (in terms of a contractual agreement) to fulfil its contractual obligations, i.e. a breach of a contractual agreement.

 

Defaulted Receivable

Receivables whose accounts are in arrears and which are therefore liable to be declared irrecoverable or liable to lead to dispute management.

 

Depositary

Financial institution responsible for holding evidence of the securitised receivables (identity of the receivables, transfer deeds, etc.).

 

Due Diligence

Checks and controls that a potential buyer performs prior to an acquisition or making an investment decision; in the USA, a broker must perform these checks before selling securities to investors.

 

E

Eligibility criteria

List of required conditions so that a debt held by an assignor can be securitised.

L

Liquidity line

External enhancement mechanism for securities issued by the SPV, which comprises a discovery contract concluded with a local bank. It ensures timely payment of the debt servicing of debt securities issued in the event of late receipt of financial flows from the receivables.

O

Overcollateralisation

Structure in which the assets exceed the liabilities. Overcollateralisation is used as a form of credit enhancement in some asset-backed transactions. For example, if an issue of 20 billion FCFA of securities can be enhanced by a group of assets valued at 21 billion, the resulting overcollateralisation of the securities is 5 percent.

P

Payment arrears

Maturity of an unpaid bond on a specified due date.

R

Ratings agency

Agency responsible for evaluating the credit risk of debt securities. The ratings agency evaluates the defaulting probability and the recoverable amount in the event of default in each class of issued securities, and gives a corresponding rating for the quantified credit risk. This exercise is repeated every year i.e. until the securities have matured.

Receivables

A right held by an individual, known as a “creditor” against an individual, knowns as a “debtor” who owed the provision of a service.

Residential Mortgage Backed Securities

Debt securities whose underlying comprises commercial mortgage loans.

RMBS (Residential Mortgage Backed Securities)

Debt securities whose underlying comprises commercial mortgage loans.

S

Senior debt security (or priority)

Security (unit or bond) whose payment takes priority over all other payments (subordinate securities, management fees, commission) made by the SPV. Due to their nature, priority securities have the lowest default risk.

SPV

An ad hoc financing vehicle created to acquire the receivables from the assignor and issue the securities on the market. This intermediary (between the assignor and the investors) guarantees the successful completion of the securitisation transaction in the event of default by the assignor.

SPV management company

Company which manages securitisation transactions, as well as accounting matters.

Subordinated security

Security (unit or bond) whose payment is subject to prior payment of the higher class. Therefore, subordinated securities suffer first in the event of the non-payment of the receivables. Often, the most subordinated securities are bought back by the assignor in order to bear the initial risk of non-payment of its debts.

Supervisory bodies

Supervisory Authority issues regulations and ensures compliance with them. In particular, it is responsible for examining and approving applications for authorisation for Management Companies, Special Purpose Vehicles and approving prospectuses.

T

Transfer deed

A legal mechanism used to transfer the Assignor’s receivables to the SPV in a simplified manner.

Securitisation is a financial engineering technique whereby illiquid receivables, held by their holders until maturity, are converted into marketable and liquid securities. Securitisation concerns both existing and future receivables. Very briefly, an entity sells its receivables to a Special Purpose Vehicle (SPV), which issues bonds (debt securities backed by the financial flows of purchased receivables) on the financial market to finance the acquisition of receivables.
Existing receivables
  • Mortgage loans granted to individuals and businesses
  • Leasing agreements
  • Consumer loans
  • Financing loans granted to companies, SMEs
  • Miscellaneous customer invoices
Future revenues
  • Property rental incomes (leasing receivables)
  • Concession revenues
  • Miscellaneous royalties (airport, port, audio-visual, etc.)
  • Subscription revenues (telecoms, audio-visual, newspapers, etc.)
  • Tax revenues (VAT, corporation tax, export tax, etc.)
  • Export revenues (notably for commodities)
For a Financial Institution
  • Converting part of an illiquid loan portfolio into cash
  • Transferring risks associated with loans while maintaining relations with clients
  • Increased ability to offer credit
  • Diversifying financing sources for investors
  • Reducing the thresholds applied to complementary fund raising (debt not recorded on the balance sheet)
  • Positive impact on banks’ complementary equity
For a company
  • Converting future revenues into cash
  • Non-recourse borrowing in the financial market
  • Diversifying the pool of the investors
  • Transferring the risk of non-payment linked to future revenues
  • Absence of transformation risks
  • Decrease in the need for shareholder equity
For a Public Entity (public treasury, municipalities)
  • Improving public finances
  • Diversifying the pool of the investors (regional, international)
  • Transforming receivables into securities that can be mobilised
  • Transferring the risk of non-payment linked to receivables
  • Fund raising without using one’s own signature
  • Debt securities are backed by well-defined assets/revenues, which are isolated from the entity of origin. The investor is only exposed to the credit risk of the underlying assets and not the entity itself.
  • Unlike bond issues, debt securities issued by a single SPV have several risk profiles/returns/maturity (several tranches are issued); the investor selects the most appropriate risk/return profile.
  • The SPV’s financial and legal structuring provides a high level of security to the issued securities . Several reliability methods are employed:
    • Overcollateralisation: This practice, which is widely used in various collateralisation contracts, consists of transferring (to the SPV) a higher nominal amount of receivables than the financing raised by the sale of the securities.
    • Issuing several bond tranches: several categories of securities are created and exposed to the risk of non-payment of debt to varying degrees. Senior tranches are the most protected bonds while Junior bonds are the most risky. The remuneration offered by the different tranches reflects the assumed risk.
  • Throughout the entire investment, the Management Company issues performance reports on the basket of receivables.
  • Debt securities are recorded on the DC/BR and can be listed to improve liquidity.
  • Assessing the finance needs and conducting a preliminary feasibility analysis As securitisation is a way to raise funds, it represents a real benefit in terms of cost/benefits compared to other financing options. The Arranger ensures that the securitisation meets the needs and understands the constraints, The prerequisite for securitisation is the existence of a significant amount of homogeneous receivables that can be assigned.
  • Analysing and selecting the portfolio of receivables to be securitised This step consists of conducting a qualitative and quantitative analysis of the securitised receivables in order to select a basket of receivables that gives predictable and reliable financial flows, and has a sound legal basis. Potentially securitisable debts are analysed on the basis of the following criteria:
      • Predictability of financial flows
      • Existence of historical performance data
      • Homogeneity, granularity, geographical/industrial diversity
    At the end of the process, a basket of receivables, including diversified, independent and weakly correlated risks, is created.
  • Structuring the transaction The Arranger is responsible for the financial and legal structuring of the securitisation transaction in collaboration with external stakeholders: lawyers, auditors, tax specialists, ratings agencies, supervisory bodies and potential investors (see: “Main Stakeholders”). Notably, it includes setting up the financial package, defining the characteristics of the bonds the SPV will issue, determining the security mechanisms to be incorporated into the financial structure, recording the bonds to be issued by a rating agency, and preparing the necessary legal documentation for the operation (fund regulations, SPV information note, transfer deed).
  • Fund raising At the end of the structuring phase, a dedicated SPV (Special Purpose Vehicle) is created to issue the debt securities required for the acquisition of the selected receivables. The Arranger carries out the approval procedures for the fund with the local regulator (CREPMF) and the organises the investment of securities in the financial market.
  • Acquisition of the receivables and launch of the SPV After the securities have been issued, the SPV transfers the raised funds to the assignor in exchange for the property rights of the basket of identified receivables. The debt securities will be repaid as the underlying receivables are amortized. Throughout the lifespan of the securities, the SPV Management Company is responsible for informing investors about the performance of the underlying receivables, and calculating the periodic debt servicing on the debt securities.
  • The Arranger The arranger is typically an investment bank, which solicits potential assignors and designs the structure of the entire securitisation transaction so that the assignor’s objectives are met and the interests of the investors are made sufficiently clear, i.e. ensuring the success of the transaction.
  • The Assignor The Assignor is the entity wishing to raise funds through the sale of a basket of existing or future receivables. It can be a financial institution or a private or public company.
  • The SPV management company The management company is authorised by the Regulator. It manages the SPV and represents the interests of investors in terms of the securities issued by the SPV. Among other things, it monitors the assignment of the receivables, manages the SPV’s cash funds, and provides the periodic information required by the supervisory bodies.
  • The Custodian The Custodian is a commercial bank authorised as a Holder of a Custodial Account and is responsible for holding the SPV’s assets.
  • Ratings Agency It plays a key role in assessing the credit quality (and the non-repayment risk) of the debt securities issued by the SPV for investors. It assesses the risk of non-payment of the basket of receivables, as well as the robustness of the implemented guarantee mechanisms.

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