Who are the key players in securitization? 2023 has so far been a bullish year for securitization, with Aur Leasing and Factoring, Contact Creditech and Contact Credit, Al Ahly Leasing and Factoring, and many more taking securitized bonds to market. These issuances come with a dizzying laundry list of jobs — from underwriters and bookrunners to legal and financial advisors. So we’ve put together a simplified guide of the key players and their roles in the process.

First things first: What even is securitization? Securitization is a financing technique whereby a company sells off some of its receivables (i.e. income-producing assets, such as auto loans, credit card debt, mortgages, or commercial paper) to a separate legal entity — a placeholder, if you will. With the help of a squad of financial and other institutions, this entity then repackages the assets into debt securities and sells them to investors. Our separate explainer on securitization (here) gets into the nitty-gritty of the financials and procedures. For the purposes of this explainer, we’ll get down to the brass tacks of who does what.

The originator is the creator of the original assets being repackaged — i.e. the underlying receivables. The originator could be a consumer finance company, car seller, real estate firm, ins. company, leasing company, or any other institution that has receivables to sell. The sale allows the originator to remove the assets from its balance sheet, increasing its funding capacity and freeing up capital for other purposes or investments that could generate higher returns.

The special purpose vehicle (SPV) is the issuer of the repackaged assets. It buys the assets from the originator and, after the transformation is all set, sells them as debt securities to investors. A legal entity separate from the originator, the SPV is a company whose sole purpose is to carry out securitization. This setup prevents the SPV from engaging in transactions that could incur debt, which would expose it to the risk of default and thereby hinder its ability to pay investors. The SPV must be licensed by the Financial Regulatory Authority (FRA), as does each issuance it puts forth. Examples of SPVs operating in Egypt include EFG Holding subsidiary Financial Group for Securitization, El Taamir Securitization, the Egyptian Securitization Company, and Al-Tawfeek for Securitization.

The legal advisor conducts due diligence on the underlying pool of assets to ensure that they are transferable, i.e. that no third parties have any claims to them and that there are no restrictions that would prevent their transfer to the SPV. It then prepares the legal documents and files them to the FRA for approval. These documents include the securitization contracts and the information memorandum (IM), which provides investors with all essential information about the issuance needed to make an informed decision. The legal advisor also registers the securities in the Egyptian Stock Exchange (EGX) and Misr for Central Clearing, Depository, and Registry (MCDR). Any licensed law firm or lawyer can act as a legal advisor.

So does the auditor: While the legal advisor evaluates the legal validity of the receivables, the auditor looks into their financial soundness. It studies the receivables and their payment histories to project their cashflows, making sure they will remain profitable. It also works with the arranger to validate the financial model of the issuance (more on that below). Based on its studies, the auditor prepares evaluation reports, which are sent alongside the legal advisor’s reports to the credit rating agency. The most eminent auditors, known as the Big Four, are Deloitte, Ernst & Young, KPMG, and PwC, all of which are international professional services networks with offices in Egypt.

The arranger’s main job is to design the structure of the issuance. Typically an investment bank, the arranger is also known as the financial advisor because it devises the financial model behind the issuance. It studies investor demand to group the securities into classes, known as tranches, that cater to different preferences and risk profiles. The arranger designs the characteristics of each tranche, including maturity date, interest rate, and remaining principal. It is also responsible for marketing the securities and bringing in investors, for which it usually has a roster of contacts.

The underwriter guarantees payment. If the arranger is unable to find investors to cover the entire issuance, i.e. if the issuance is undersubscribed, it may buy the unpurchased portion for an extra fee — a role that is referred to as underwriting. Investment banks typically charge hefty fees in exchange for assuming the financial risks associated with underwriting. The arranger may be joined in this task by other parties, like another investment bank or a commercial bank.

The credit rating agency evaluates the creditworthiness of the securities, which measures the likelihood that debt will be repaid. The lower the risk of nonpayment, the higher the rating the agency gives. Rating agencies assess a number of factors, including the quality of the underlying asset pool, strengths of the originator, legal risks, and the soundness of the security’s structure. There is only one credit rating agency in Egypt right now: MERIS (Middle East Rating & Investors Service), a joint venture between Moody’s and Finance and Banking Consultants International (FinBi).

The bookrunner runs the investor order book. Subsequently, it places the issuance — which entails determining how much of the security is issued to each investor. This pivotal position puts the bookrunner at the top of the hierarchy of roles in securitization transactions. The bookrunner, typically a commercial or investment bank, also plays the role of collecting the proceeds of the issuance from investors.

The custodian is the safekeeper of all documents. Typically a bank or another large, reputable institution, the custodian stores the securitization documents to safeguard them against loss and theft. These include the underlying receivables and all contracts. It also offers related services like managing customer accounts, settling financial transactions, and preparing tax filings.

The types of investors authorized to subscribe to securitized assets are determined by the FRA. Also known as subscribers, investors are usually banks, insurance companies, or investment funds. The securities may be sold to investors via private placement or public offering.

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