{"id":548252,"date":"2022-08-01T03:30:55","date_gmt":"2022-08-01T03:30:55","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/blackboards\/how-the-defensive-nature-of-the-education-sector-makes-it-a-prime-candidate-for-future-flow-securitization\/"},"modified":"2022-08-01T03:30:55","modified_gmt":"2022-08-01T03:30:55","slug":"how-the-defensive-nature-of-the-education-sector-makes-it-a-prime-candidate-for-future-flow-securitization","status":"publish","type":"blackboard","link":"https:\/\/enterpriseam.com\/egypt\/blackboards\/how-the-defensive-nature-of-the-education-sector-makes-it-a-prime-candidate-for-future-flow-securitization\/","title":{"rendered":"How the defensive nature of the education sector makes it a prime candidate for future flow securitization"},"content":{"rendered":"

<\/a> Why future flow securitization could be the debt instrument of choice for<\/strong> education players moving forward:<\/strong> Last year, the Financial Regulatory Authority (FRA) approved amendments<\/a> to the Capital Markets Act that would allow service providers to raise capital by selling securitized bonds to investors after pooling together so-called \u201cfuture flows\u201d \u2014 promising to pay back using money they can reasonably expect to make at a future date. We are now on the cusp of Egypt\u2019s first-ever future flow securitization issuance, after EGX-listed private sector education outfit CIRA became the first company to receive approval<\/a> from the FRA to take a EGP 2 bn future flow securitized bond program<\/a> to market, putting the spotlight on the possibilities this debt instrument could offer for the education sector.<\/p>\n

What is future flow securitization?<\/strong> The newly-introduced financing tool involves creating bonds with a promise to create assets in the future. Future income \u2014 whether from club memberships, phone bills, utility payments, tuition fees or rents, all of which can typically be predicted and are more or less consistent flows \u2014 is packaged into securities and offered to investors in order to raise capital. This gives public- and private-sector companies such as utilities providers, healthcare companies, telecom players, and education outfits a new way to access liquidity. We have a <\/strong>handy explainer<\/a><\/strong> on the tool breaking down exactly how it works.<\/p>\n

Why does it work for the education sector? <\/strong>\u201cThe education sector is known for its very defensive cashflows,\u201d CIRA CEO Mohamed El Kalla tells Enterprise. \u201cThe minimum a client stays with us is four years, which is the university tenure, and it can go up to 12 years for K12,\u201d he said. \u201cNo one will stop sending their students to schools,\u201d said Zulficar and Partners founding partner and head of capital markets Anwar Zeidan. The firm \u2014 led by Zeidan and another one of Zulficar\u2019s founding partners, Ashraf Ihab \u2014 provided legal counsel to CIRA and helped the company prepare its first EGP 800 mn issuance. \u201cThat\u2019s why, in my view, education is the most suitable sector for this tool,\u201d he adds.<\/p>\n

For education players, cashflow > physical assets. <\/strong>The strengths of an education management company lie not in its physical assets, but in the fact that schools are operating and bringing in consistent cashflows in the form of tuition fees, El Kalla said. \u201cThe issue with other types of loans and bonds is that they rely on physical assets for collateral, and in education players\u2019 case, an empty physical asset means nothing compared with its stable cashflow,\u201d he said.<\/p>\n

That means debtors will be looking at cashflow instead of asset value:<\/strong> \u201cCompanies have to build a solid case for the business\u2019 expected performance over the next ten years, specifically on the revenue angle,\u201d El Kalla explained. The regulator then does due diligence on the company\u2019s debt history and current debt levels, he added. \u201cYou\u2019re basically building a case around the bankability of your cashflow, rather than the value of your assets,\u201d El Kalla said.<\/p>\n

The absence of asset valuation makes the debt-raising process more straightforward: <\/strong>\u201cThis tool takes away the legwork of obtaining guarantees and asset valuations before every issuance you take to the market,\u201d El Kalla said. \u201cDuring such difficult times for markets, even agreeing on asset valuations is very complicated,\u201d he added, noting that cashflows, on the other hand, are a much more transparent and \u201cnon-debatable\u201d form of collateral to work with.<\/p>\n

Access to liquidity also helps eliminate risk:<\/strong> \u201cAny debt has its own risks,\u201d El Kalla said. \u201cThe usefulness of this tool is that when your guarantee is your top line, you have access to cash coming in rather than standing on stagnant, physical assets,\u201d he explained.<\/p>\n

That makes it very appealing to investors:<\/strong> \u201cOur program is already getting a strong appetite from investors,\u201d El Kalla said. \u201cThere\u2019s direct access to [liquidity] for debtors,\u201d he added, which makes it a relatively safe investment. The fact that future flow securities receive investment-grade ratings from ratings agencies also helps attract a wider class of investors.<\/p>\n

The tool comes at a crucial time for education players:<\/strong> \u201cEquity markets are currently in a very bad place, so the only viable capital raising method at the moment is debt,\u201d Zeidan said. Education shares have not been spared the volatility of the markets since the beginning of the year, as we\u2019ve reported<\/a> previously. Private schools have also been struggling<\/a> with meeting additional CAPEX costs on the back of rising inflation.<\/p>\n

Rising CAPEX costs could push more education players to use this tool:<\/strong> \u201cIncreased inflation has definitely been putting pressure on both OPEX and CAPEX costs,\u201d Omar El Bakry, BalancED Education\u2019s group business development director, told us.\u201d Higher land and building costs specifically have severely increased CAPEX costs for new green field projects, making it essential to explore all possible financing options.\u201d BalancED could look towards future flow securities to help fund new projects\u2019 CAPEX costs, El Bakry said. But the company is \u201cstill seeking more clarity on details such as market appetite, process, and pricing compared to more traditional debt tools,\u201d he added. CIRA is also using the funds to finance CAPEX costs associated with its growth plans in the next three years, including expanding its university and K-12 offering, El Kalla said previously.<\/p>\n

And for some, interest rates will be a major deciding factor:<\/strong> \u201cWe would consider future flow securitization if we were actively pursuing debt financing and if future flow securitization enabled us to obtain debt financing at reasonable rates,\u201d Tammam Abu Shakra, advisor to the chairman of Esol Education<\/a>, told us.<\/p>\n

Securitized bonds generally have lower interest rates than non-securitized bonds<\/strong>, making future flow securities a cheaper alternative to expensive bank loans. El Kalla pegs future flow securities\u2019 interest rates \u201cat the lower margins\u201d of interest rates of sukuk and securitized bond issuances.<\/p>\n

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