All companies are faced with the unending need to access more capital and consequently, the appetite to adopt innovative and creative methods of raising funds with minimal liability is increasing. Generally, capital may be raised by simply inviting the general public to invest in the shares of the company and thereby becoming shareholders. The company may also reach out to financial houses or even the general public to take credits for its activities. One of the novel means of generating fund by companies is by pooling illiquid assets together and transforming the same into tradable assets which are then issued to investors1. This process is known as Securitization and it is optimally realized through the transforming machinery of a Special Purpose Vehicle (SPV). This write-up shall briefly discuss the process of Securitization and the use of Special Purpose Vehicle (SPV) as a means by which companies can raise capital with a focus on the regulatory framework governing the process in Nigeria.
1.0 Securitization and Special Purpose Vehicle (SPV)
Securitization is the process of turning assets into securities which involves an arrangement in which one party (the originator) sells a portfolio of assets to a special purpose vehicle (the issuer), who finances the purchase by packaging the cash flows from these assets as tradable financial instruments, which are sold to investors2. It is simply the process of pooling and repackaging of homogenous, illiquid financial assets/receivables into marketable securities that can be sold to investors3. The underlying assets used as securities for investors under securitization could either be Asset-backed- Securities (ABS) or Mortgage-backed Securities (MBS).
Special Purpose Vehicle (SPV) is a legal entity such as a corporation, trust or partnership established for a specific and limited purpose. SPV does not have the right or ability to engage in any activities other than those rightly granted to it in the legal documents creating and governing the securitization transaction and the SPV4. The SPV essentially acts as a depository for a specific group of assets in a securitization process, and in turn issues securities to the market place for purchase by investors5. It is worthy of note that one of the essential features of an SPV is embedded in the principle of bankruptcy remoteness i.e. a securitization SPV is never threatened with potential bankruptcy. In other words, should the sponsoring company enter into bankruptcy proceedings, the company's creditors cannot seize the assets of the SPV.
With regards to the transfer of assets from the originator to the SPV, it is important for the transfer to qualify as "true sale" i.e. both the reward and risk associated with the asset is passed on to the SPV before such assets can be legally separated from the originator.
A simple description of a process of securitization is as follows: a company who is an owner of receivables (the originator) sells the receivables to a third party (Special Purpose Vehicle). The SPV then secures funds from investors to finance the purchase price of the receivables and later repays the investors out of the proceeds of the receivables bought by it.
Some of the essential participants in a typical securitization process includes: Originator/ Sponsor, the Special Purpose Vehicle, Investors, Servicer, Trustee and Rating Agencies.
2.0 Benefits of Securitization
Some of the benefits and advantages of securitization include6:
a. Improved liquidity: securitization ensures fast capital liquidation by originating companies so that they can engage in other business as opposed to tying down capital for a long period as securitization helps to transform illiquid capital into liquid capital.
b. Balance Sheet Benefits: Securitization accelerates cash receipts from the receivables while removing the receivables from the originator's balance sheet. It provides off balance sheet financing as opposed to on balances funding as in the case of book debt.
c. Protection of Investors: Securitization offers protection for investors against the credit risk exposures of the originating company as the true sale transfers all the risks and benefits of the assets in question to the SPV which is a distinct entity and bankruptcy remote.
d. Risk management: Securitization provides a platform whereby the originator is able to transfer risk without actually selling off its assets.
e. Diversification of source of fund: Securitization stimulates the growth of the economy, through the provision of additional ways of raising funds for business activities.
3.0 Securitization in Nigeria
The major legal/regulatory framework on securitization in Nigeria is the Securities and Exchange Commission's (SEC) Rules on Securitization, 2015. However, there is a pending bill before the legislature, the Nigerian Securitization Bill ("NSB") which aims at regulating securitization practice in the country. Also worthy of note is the Asset Management Corporation of Nigeria Act, 2010 (the AMCON Act) 7 as amended which has a structure akin to asset securitization to rehabilitate distressed financial institutions.
The SEC Rules refers to Securitization simply as the issuance of securities backed by a pool of assets and to SPV as a legal entity formed with the exclusive purpose of acquiring and holding certain assets for the sole benefit of noteholders in the Asset-backed securities, such that the noteholders have acquired nothing but undivided interests in the asset pool8. The SEC Rules makes provisions for registration of securitization with Securities and Exchange Commission, the creation of SPVs, Powers of SPVs, restrictions on the activities and operation of SPVs, eligible assets in securitization transactions among others. Some of its important provisions are briefly highlighted below:
The Rules indicates that the SPV for Asset-Backed Securities must be incorporated as a public Limited Liability Company or a Trust created by a written instrument or any other legal entity permitted by Securities and Exchange Commission. The SPV must bear the acronym "SPV" in its incorporated name while its memorandum and articles of association must be limited to matters related to securitization transaction9.
Also according to the SEC Rules, the SPV shall have as its objectives matters related and limited to the securitization transaction such as the acquisition management and collection of assets, the assumption of risk, the issuance of ABS to investors and the engagement of a manager (servicer) to administer the pool of assets10. Also, the SPV shall not have any employee and as such shall contract out all services to third parties and shall keep separate records and books of accounts, among others11.
With regards to the constitution of the board, the SEC Rules stipulates that not more than 30 percent of the directors of the SPV shall be nominees of any sponsor or associated in any manner with the sponsor or any of the sponsor's subsidiaries12 while no person who has been convicted by any court of competent jurisdiction, suspended or barred from capital market activities shall be eligible to be a director of an SPV13.
Above are few provisions of the SEC Rules regulating the process of securitization in Nigeria. However, the SEC Rules has several other provisions on the subject.
Conclusively, Securitization has several advantages if well explored by companies in raising capital for their various needs as highlighted above. However, this option is not being explored by many companies in Nigeria majorly because they may not be aware of its existence and process. This write-up has been able to discuss briefly the process of securitization, the use of Special Purpose Vehicle (SPV) as a means by which companies may raise capital and the regulatory framework governing the process in Nigeria.
Footnotes
1 Abibu A. & Balogun S. 2016. Securitization in Nigeria: A Legal Perspective. International Journal of Innovative Research and Advanced Studies (IJIRAS) Vol 3 Issue 12
2 Oxford Dictionary of Accounting (2010)
3 Sundaresan S. 1997. Fixed Income Markets and Their Derivatives. South-Western Publishing.
4 Ehimony Y. 2015. An Introduction to Securitization. SSRN Electronic Journal. 10.2139/ssrn2647984
5 The Bond Market Association, International swaps and Derivatives Association, Securities Industry Association (2002) Special Purpose Entities (SPEs) and the Securitization market; Retrieved on December 27, 2019 from http://www.isdz.org/speeches/pdf/SPV/Discussion piecefinalfeb01.pdf
6 Abibu A. & Balogun S. 2016 Op.cit. See also Akintola F. (2018) Securitization as A Panacea for Non-Performing Loans; A Critique of The Effectiveness of Asset Management Corporation of Nigeria As A Special Purpose Vehicle. Retrieved on December 27, 2019 from http://www.academia.edu
7 Cap A24A Laws of the Federation of Nigeria, 2010
8 Art. A Securities and Exchange Commission's (Sec) Rules on Securitization, 2015
9 Art. C(1), Ibid
10 Art. C (3) & (4). Ibid
11 Art. C (5) & Article E (1), Ibid
12 Art. C (6) & Art. E (2), Ibid
13 Article C (7), Ibid
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
