The securitisation market, which has been around for a number of years, has just played host to a superb transaction initiated by Maghreb Titrisation, a subsidiary of CDG, on behalf of ONEE, via its dedicated fund, FT ENERGY COMPARTMENT II.
There is absolutely no doubt that this securitisation transaction, completed 13th October, amounting to MAD 1.5 billion of receivables held by the National Office of Water and Electricity, may be regarded as a classic business school case study.
The transaction, ONEE’s fifth securitisation transaction, was three times oversubscribed. It referred to current and future trade receivables billed by the Office to its major electricity customers, that is, those whom ONEE supplies with high- and very-high-voltage electricity.
Indeed, as soon as a certain level of sales can be predicted, the receivables may be securitised. And that was exactly what ONEE did, securitising trade receivables that it had billed its major industrial customers including OCP and TAQA.
The FT ENERGY COMPARTMENT II bonds have a maturity of 52 weeks and are redeemable at maturity.
They carry a nominal interest rate of 2.98% i.e. benchmarked against the secondary market rate for 1-year (52-week) Treasury bills on 20th September 2017 plus a 65-basis points risk premium.
The origins of securitisation
But while the securitisation of ONEE’s receivables grabs the headlines in today’s financial news, it is worth noting that it is the culmination of a long process.
First, in terms of the concept, because securitisation has developed in such a way that it now affects the bottom as well as the of the balance sheet.
Asset monetisation through securitisation, which previously related to non-current assets such as buildings and investment securities, has seen a shift to inventories and accounts receivable, so as to improve companies’ working capital requirements that were often hitherto financed by classic bank overdrafts.
The securitisation of accounts receivable is a phenomenon which has been driven by the needs of the marketplace. And, ONEE was the first to do it, supported by Maghreb Titrisation.
Legislation permitting monetisation of existing and future accounts receivable so as to pre-finance sales was enacted in 2012.
It is worth noting that ONEE is a public entity which distributes a staple commodity, electricity, the price of which is set by the government for each category of electricity distributed, with ONEE being entrusted with the role of benefits office.
As a result, ONEE’s revenue is regulated. But its costs, however, are not. Certain current expenses, such as fuel oil or coal, are subject to fluctuations in world prices which generate foreign exchange risk when purchasing in foreign currencies.
Others, such as ONEE’s structural investment-related costs are growing steadily.
ONEE has not therefore been able to generate positive operating cash flow while negative operating income and borrowing costs have also weighed down on its performance, making it a somewhat unattractive proposition when it comes to applying for finance from banks.
ONEE’s restructuring was achieved by a MAD 2 billion cash injection from the State and a gradual increase in electricity prices from 2014 onwards as well as signing programme contracts with the State in 2014, 2015, 2016 and 2017.
Lower oil prices have also contributed to a reduction in ONEE’s expenses, helping it to keep its head above water.
To finance the Office’s return to equilibrium and normalise its financial position, the idea was mooted as to whether to resort to securitisation to meet its financing needs.
The very concept of securitisation would enable the Office to offer investors a pool of assets that were much less risky than the Office itself and, in particular, accounts receivable from its high- and very-high-voltage customers, translating into receivables on an annual revolving basis.
Since 2013, ONEE found it difficult to place its annual securities issuance. All this has changed. Today, these securitised instruments are met with strong demand from investors.
ONEE’s paper, highly attractive!
Indeed, ONEE’s paper is risk-free with a decent yield to boot.
And, fully aware that there is currently a liquidity surplus in the market and with fewer Treasury issues, investors are looking for paper whose risk they are able to control with some predictability, credit enhancement mechanisms and provisioning prior to the payment date.
The required guarantees are all there, offering investors securities of very high quality with a very attractive risk profile.
This is illustrated by the current MAD 1.5 billion transaction to securitise ONEE’s accounts receivable, which carries a risk premium of just 65 basis points, that is, an annual rate of 2.98%, instead of the 100-basis points premium applied to its previous issues.
This is why the MAD 1.5 billion transaction was oversubscribed three times, underlining investor confidence.
ONEE has raised a total of MAD 6.8 billion between 2013 and 2017 from securitising its accounts receivable.
In fact, ONEE’s star is in the ascendant since, for the first time in a long while, the Office turned a profit in 2016 and 2017 is also looking very positive.
As a result, in addition to the guarantees provided by the manner in which the securities offering is structured, the Office is itself in good health, which is very good news for investors.
Let’s not forget, however, that investor enthusiasm for the issue, which was three times oversubscribed, was also driven by market conditions.
Because today, stock market returns are highly uncertain while investors have little interest in corporate bonds, if they are not secured by banks…
Money market funds managed on behalf of institutional investors, on the other hand, clearly had a strong appetite for MAD 1.5 billion worth of ONEE’s debt securities as they made up 80% of the subscribers!
And the number of investors, which is constantly on the rise, now includes banks, insurance companies, pension funds and even large corporates.
As a matter of fact, we can measure how far we have come in just a few years. For ONEE’s first securitisation issue, there were just five or six of them for a volume of MAD 1 billion.
It’s taken more than 5 years for investors to understand that it makes more sense to be exposed to a securitisation fund requiring ‘risk-based pricing’ than to subscribe to an unsecured bond issue.
It is worth noting that, overseas, the advantages of securitisation are well known and this technique has been used for a long time.
Banks, for example, securitise so as to be judged on only a portion of their assets and not on their overall financial health, which explains why securitisation has been so popular in the United States as well as in France!
And the reason why Moroccan banks do not resort to securitisation is because they have easy access to liquidity.
Securitization is proving, however, to be an ideal financing method for every type of business, given its increased accessibility.
Of the four different financing methods available to businesses, securitisation is fast becoming an essential option because of the guarantees offered to investors.
Accessing capital is the most challenging avenue for businesses. That is why increasing share capital or an initial public offering are preferred.
Bank lending, the classic source of finance, is restricted by the requirements of the banks.
The third method of financing, via the capital markets, is hindered by a lack of guarantees when issuing conventional bonds…
Afifa Dassouli
Original article : https://lnt.ma/titrisation-atouts-avantages-lonee-cas-decole/