{"id":576107,"date":"2020-11-10T03:57:34","date_gmt":"2020-11-10T03:57:34","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2020\/11\/10\/enterprise-explains-securitized-bonds\/"},"modified":"2020-11-10T03:57:34","modified_gmt":"2020-11-10T03:57:34","slug":"enterprise-explains-securitized-bonds","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2020\/11\/10\/enterprise-explains-securitized-bonds\/","title":{"rendered":"Enterprise Explains: Securitized Bonds"},"content":{"rendered":"

<\/a> Enterprise Explains: Securitized Bonds<\/strong>. <\/strong>With a record-breaking offering<\/a> about to hit the market, securitized bonds are becoming an increasingly popular method of debt finance among real estate and consumer finance companies \u2014 private-sector and government-owned alike. Sarwa<\/a>, Madinet Nasr Housing<\/a>, Palm Hills<\/a>, Raya<\/a> and NUCA<\/a> have all hopped on the securitized bondwagon (ahem) as of late, but what are securitized bonds, and how do they work?<\/p>\n

Securitized products are backed by a portfolio of financial assets<\/strong>, which are pooled and repackaged as tradable securities, in this case as bonds. A wide range of assets can be securitized: residential and commercial mortgages, credit card debt, auto loans and receivables can all be packaged up and sold off to investors. The bonds are issued by a special purpose vehicle (SPV), a separate legal entity set up by the institution specifically to sell the bonds. The company sells the assets to the SPV and pockets the cash \u2014 removing the assets from its balance sheet \u2014 and the SPV then issues the bonds.<\/p>\n

But wait, aren\u2019t they the same thing as secured bonds?<\/strong> The creation of an SPV is what differentiates securitized bonds from secured bonds. The latter are guaranteed directly by the assets without the SPV as an intermediary.<\/p>\n

So what are they good for? Securitized bonds offer quick liquidity to companies with steady future revenue streams from things like installment payments<\/strong>, and they allow companies to pay out interest in installments rather than as a lump sum when the bond matures. For financial institutions, enhanced liquidity means they can provide loans at a lower interest rate. For other companies, it means they can have the cash on hand while parking risk on the SPV. The SPV makes its money off the spread, the difference between the interest rate at which they purchased the assets and the interest rate on the bonds.<\/p>\n

They\u2019re a versatile form of investment: <\/strong>Because securitized bonds are issued in tranches, investors are better able to diversify, combining products with different yields, risk, and maturity in their portfolio.<\/p>\n

And they offer investors a low-risk alternative to sovereign and corporate bonds: <\/strong>As they\u2019re ultimately backed by assets, the risk of default is relatively low. The securitization process creates bonds that are \u201ccredit enhanced,\u201d meaning their credit rating is higher than that of the underlying asset pool. Consequently, though competitive, the interest rates offered by securitized bonds will generally be lower than unsecuritized alternatives, which offer no collateral in the event everything goes bust.<\/p>\n

The catch, though, is that in Egypt the real buyers of securitized offerings have, so far, been banks. <\/strong>It\u2019s only this year that the Financial Regulatory Authority has started talking about how to make it possible for retail investors and non-bank institutional investors<\/a> to get in on the action through a new type of fund.<\/p>\n

Want more?<\/strong><\/p>\n