Securitisation 2020 Comparisons

Last Updated January 13, 2020

Contributed By Matouk Bassiouny

Law and Practice

Authors



Matouk Bassiouny is a full-service independent law firm based in Cairo, Egypt, with offices in UAE and Sudan. It specialises in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and business in Egypt and the region. The team of 18 partners and over 145 lawyers are trained both locally and internationally and are fully conversant in English, Arabic, and French. The firm's finance and projects group’s primary goal is to provide clients with legal advice on the banking and finance sector in Egypt as well as on the strengths and weaknesses of security available to lenders in the Egyptian market. The finance and projects group maintains close relationships with Egyptian financial institutions, which enable it to have first-hand knowledge of what constitutes commercially acceptable solutions for the major institution involved in large-scale deals.

Securitisation is regulated in Egypt under the Capital Market Law, which sets out the approvals required for establishing a securitisation company (the special purpose vehicle, SPV). The SPV undertakes the activity of issuing tradable bonds against the financial rights and future receivables, along with prescribed collaterals, assigned in its favour (ie, the securitisation portfolio). Securitisation under Egyptian law is perfected through the assignment of the securitisation portfolio by the originator to the SPV, which follows the complete subscription of issued bonds by the SPV.

The originator’s bankruptcy will have no effect on the financial assets to the extent that the securitisation transaction has not been in breach of the Bankruptcy Law. The Bankruptcy Law requires for any transaction immediately occurring prior to the bankruptcy ruling to be of genuine commercial purpose. It is a remote risk, though, to have the securitisation transaction invalidated for breach of the Bankruptcy Law, given the oversight of the Financial Regulatory Authority on all steps starting from the establishment of the SPV and complete subscription in the bonds issuance. Generally, the debtor who was declared bankrupt by a court may not administrate or dispose of its assets, including for example, by way of an assignment or a true sale of the securitisation portfolio.

The SPV shall submit the documents evidencing the assigning of the portfolio and the collected proceeds, after deducting the SPV’s receivables and the securitisation expenses, with a custodian in favour of the bondholder. The amounts, documents, financial and commercial papers submitted with the custodian are owned by the bondholders and do not fall within the wealth of the SPV nor the general collateral of the creditors of the originator or the SPE. Other than the securitisation portfolio, the bondholders have no right to enforce against the assets of the SPE.       

Characteristics of True Sale v Secured Loan

A true sale transaction involves several relationships, including an in-kind sale of assets, an issuance of bonds or other securities, and the mutual agreement that the assets are backing or guaranteeing these securities. The sale agreement is the agreement whereby the seller is bound to transfer the ownership of a specific asset to the buyer in return for a monetary value or a consideration. A loan is an agreement by which the lender transfer the property of an amount of money or “other fungible asset” to the borrower on the basis that the borrower will return it at the end of the loan or return “something with the same amount type, and characteristic”. The difference between them might be subtle and theoretical, although the core subject matter in a true sale is the transfer of the asset or portfolio of assets rather than mere exchange of money.

A secured loan can be guaranteed by several alternatives, such as real estate mortgage, movable collaterals, pledge of shares, corporate guarantees, etc; in the true sale, however, although there could be credit enhancements, transactions usually rely on the assets transferred as a security for the issued securities.

Difference in Protection for Transferred Assets between True Sale and Secured Loan

There is no material difference in protection for the securitisation portfolio between a true sale and a secured loan given that there is no breach of the Bankruptcy Law provisions. The quality of any security will depend on its type and the efficiency of the related enforcement proceedings. Secured loans enjoy as a matter of practice diversity in the collaterals that can be included. A security taken on an in-kind asset, such as a pledge on shares or other assets of high liquidity, would be preferable to the general claim on the monies of an obligor or a guarantor.

Legalities of True Sale v Secured Loan

Any debtor is prohibited from taking an action which contradicts the reconstruction plan prepared under the administration of the court in the process of its bankruptcy, including the execution of a true sale, granting securities, and assigning any of its rights. In case the competent court declared the debtor as bankrupt, it shall not administrate or dispose its assets and hence the true sale/secured loan/assignment of right will not survive.

With regard to the order of creditors in light of a secured loan, following the issuance of judgment declaring the bankruptcy of the debtor, the order is determined as follows: (i) lien rights mandatorily privileged by law take priority (such as debts related to judicial expenses and tax dues); (ii) secured creditors will then recover their outstanding debt up to the value of the collateral assets, according to their ranking of registration (ie, first, second, third degree); and (iii) the unsecured creditors will then share any remaining enforcement proceedings on a pro rata basis related to the total indebtedness of the debtor, including the secured creditor sharing with the difference between any outstanding amounts due after consuming the value of collaterals.

Opinion of Counsel

An opinion of counsel to support the bankruptcy remoteness of the transfer may be envisaged. Such opinion will cover the necessary steps to undertake the securitisation. The opinion will include the verification that the assignment of the securitisation portfolio is valid, unconditional, and transfers all the rights and receivables along with the relevant collateral. In this regard, the originator shall grant the existence of the securitisation portfolio at the date of the assignment. The opinion will also cover whether the assignment of the securitisation portfolio was valid and effective in the period during which the originator was subject to any procedures under the Bankruptcy Law preventing it from undertaking such act. 

Other Relevant Aspects

The Bankruptcy Law provides two precautionary procedures prior to the entrance into bankruptcy proceedings, which are restructuring and rescue planning. Further, following the issuance of a judgment declaring bankruptcy of the debtor, interests on unsecured loans shall be suspended, and the interests on secured loans may not be requested unless to the extent of the amounts collected from selling the collateral assets. Payment of the principal shall take priority, followed by the interest due before the issuance of the judgment, then the interest due after the issuance of the judgment. 

The financial risk of the originator/affiliate will not affect the assigned securitisation portfolio to the extent that the assignment of the securitisation portfolio was not undertaken in breach of the Bankruptcy Law. This based on the Capital Market Law, which provides that the documents evidencing the assignment of the securitisation portfolio and the collected amounts after deducting the securitisation fee and the amounts due to the securitisation company are owned by the bondholders and shall be submitted to the custodian. The documentation and amounts submitted to the custodian neither fall within the wealth of the SPE nor the general collateral of the creditors of the originator or the securitisation company.

Required or Desirable Aspects of an SPE

The company undertaking the securitisation activity shall take the form of a company limited by shares established for this purpose with a paid-up capital not less than EGP5 million at the date of incorporation. The company limited by shares is formed of companies under Egyptian law which capital is composed of (i) quota or more owned by jointly liable partner(s), and (ii) equal or more value shares subject to the subscription of shareholder. A prior approval from the Financial Regulatory Authority (FRA) is required in order to undertake securitisation activity and registration fees of EGP10,000 must be paid.

Risks of Consolidation

The financial risk of the originator or an affiliate will not affect the assigned securitisation portfolio to the extent that the assignment of the securitisation portfolio was not undertaken in breach of The Bankruptcy Law. Please see 1.1 Insolvency Laws, above.

Opinion of Counsel

An opinion of counsel to support the bankruptcy remoteness of the SPE may be envisaged. Such opinion will cover the necessary steps to undertake the securitisation. The opinion will include the verification that the assignment of the portfolio is valid, unconditional, and transfers all the rights and receivables along with the relevant collateral. In this regard, the originator shall grant the existence of the portfolio at the date of the assignment. The opinion will also cover that the assignment of the portfolio was not effected while the originator was subject to any procedures under the Bankruptcy Law preventing it from undertaking such act. 

Other Material Aspects of an SPE

Any joint stock company (ie, not an SPV) has the right to issue securitisation bonds guaranteed by independent portfolio from its financial rights upon a request and approval from the FRA. Further, the custodian shall hold separate accounts for each securitisation transaction, and shall hold separate accounts and registers for each transaction. 

In order to ensure an assignment of securitisation portfolio is valid and enforceable toward the original debtors or third parties it shall meet the general requirement as follows:

  • the assignment of the securitisation portfolio shall be either accepted or notified to the original debtor(s);
  • the execution of the securitisation portfolio assignment agreement in accordance with a form prepared by the FRA;
  • the submission of a certificate, by the SPE, evidencing the credit rating of the portfolio which the bonds are issued in return;
  • the SPE shall submit the documents evidencing assignment of the securitisation portfolio and any proceeds collected with a licensed custodian.

The originator represents that the securitisation portfolio validly exists at the date of the assignment. The FRA shall be notified of such assignment, along with the publication of a summary of the assignment agreement in two daily morning newspapers including one at least in the Arabic language. The credit rating shall not be less than the level evidencing the capacity for fulfilling all the obligations under the assigned rights, in accordance with the rules declared by the FRA.

For differences between true sale and secured loan requirements and rights, please see 1.1 Insolvency Laws, above.

A securitisation portfolio is already isolated from the risk of bankruptcy of the originator due to the securitisation structure clarified under 1.1 Insolvency Laws, above.

There is no particular tax law that provides for the rules under which a securitisation transaction must be treated. However, the Capital Markets Law provides that the assignment of the securitisation portfolio is exempted from stamp duty taxes. 

The SPE will be subject tocorporate profit tax (CPT), being a commercial activity. Generally, the CPT is imposed on revenues resulting from all industrial and commercial transactions occurred in Egypt. Additionally, the profits resulting from the investment or disposal of financial instruments abroad is subject to the CPT. 

It is a general rule that cross-border payments made by an Egyptian resident company (for tax purposes) is subject to a 20% withholding tax. This rate may be reduced in cross-border transactions under any applicable international tax treaty. It is worth noting that loans which terms exceed three years are exempted from the mentioned withholding tax. The capital profits resulting from a disposal of financial instruments listed with the Egyptian Exchange (EGX) will attract taxes at the rate of 10%.

General tax-related queries should generally be referred to a tax specialist. 

Legal advisers usually suggest referring any general tax-related queries to a tax specialist.

We are not aware of any legal issues that arise in connection with the accounting rules applied to securitisation.

Please refer to 3.1 Legal Issues with Securitisation Accounting Rules, above.

The Capital Markets Law regulate the requirements of disclosures in a securitisation transaction. The special purpose vehicle must be established subject to a prior approval from the Financial Regulatory Authority. The Authority has complete control over the whole securitisation process starting from the establishment of the SPV, the approval of the assignment agreement, and the approval of the bonds subscription prospectus. The prospectus must be disclosed in public newspapers and shall mention  several important aspects related to the rating of the bonds and the quality of the assigned assets and portfolio, including details about any history of default and the rate of collection for the receivables.     

Please see above, 4.1 Specific Disclosure Laws or Regulations. In addition, disclosure of the traded financial instruments is regulated under the Egyptian Law by virtue of the following:

  • Decision No 11 of 2014 issued by the FRA regulating the rules for listing and delisting of shares on the Egyptian Exchange (EGX), as amended (rules);
  • the executive procedures of the rules for listing, continuation of listing and delisting of shares on the EGX (executive procedures); and
  • other decisions issued by the FRA regulating the securitisation.

Material Forms of Disclosure

There are three main forms of disclosure in respect of offering tradable financial instruments, which are as follows:

  • public subscription;
  • public offering; and
  • private offering.

According to the Capital Market Law, no Egyptian or non-Egyptian juridical person – regardless of either its nature or the legal system which it is subject to – shall offer financial instruments in a public subscription unless it submits a prospectus that is:

  • ratified by the FRA;
  • prepared on the FRA’s forms; and
  • according to the conditions and procedures provided under the executive regulation.

The summary of the prospectus, or the disclosure report prepared for offering in relation thereto, is published according to the publishing means set by the board of directors of the FRA. Additionally, the board of directors of the FRA shall set the regulations to be applied when offering any financial instruments in a public subscription, public offering or private offering based on the type of each financial instrument.

Offering tradable bonds for the purpose of securitisation usually takes place in the form of private offering. In addition, the relevant custodian shall prepare a monthly report on the securitisation portfolio and shall notify the FRA and the bondholders, or their representatives, of such report after being ratified by the auditor. Such report shall include, among other, the following:

  • amounts collected during the report period;
  • amounts paid from bondholders’ dues;
  • commissions and expenses deducted; and
  • anything that could materially affect the quality of the guarantees relating to the assigned rights.

Principal Regulators

The main regulators for the issuance, and offer, of tradable financial instruments are the FRA and EGX. Both authorities have roles that complement each other during the process of any issuance.

The FRA is responsible for monitoring and supervising non-banking financial markets and instruments, including capital markets, futures exchanges, insurance activities, mortgage finance, financial leasing, factoring, and securitisation. This is in order to:

  • ensure the integrity and stability of such markets and instruments;
  • regulate and develop concerned activities;
  • guarantee balance of participants’ rights; and
  • create means and systems and issue rules that ensure efficiency and transparency of these activities.

Furthermore, and in addition to other jurisdictions/competences assigned to the FRA by any other legislation, the FRA shall be responsible for applying the provisions of the Capital Market Law and its executive regulations, and shall take necessary measures to achieve its objectives, in particular:

  • regulate and develop the capital market – the FRA should be consulted in draft decisions and laws related to the capital market;
  • organise and supervise training programmes for persons working, or willing to work in the capital market;
  • supervise the provision and publication of adequate information and data on the capital market, and ensure its accuracy, validity and clarity;
  • control the capital market to ensure that the transactions conducted in relation to the tradable financial instruments are carried out on a sound basis and are not made defective by any fraud, swindle, deception, exploitation or fake speculation;
  • take necessary measures to monitor the application of the provisions of the Capital Market Law and the decisions issued for executing it.

According to the Capital Market Law, the EGX shall be responsible for the listing, delisting and trading of financial instruments. The EGX shall carry out the competencies prescribed for it by laws and regulations in order to ensure a safe trading of financial instruments, an efficient performance of its participants and improve the fluency of the market and the stability of transactions therein. The EGX, additionally, shall take the necessary measures and procedures to (i) prevent the violation of the rules and regulations governing the market, and (ii) to monitor the violations thereof, rectify them and face the consequences thereof.

Companies and entities wishing to list and offer their financial instruments in the EGX, shall be obliged to (i) pre-register with the FRA in accordance with the rules determined by the board of directors of the FRA, then (ii) apply for listing or listing and offering their financial instruments in the EGX (as the case may be) within one month starting from their registration with the FRA. This time limit may be extended upon the approval of the FRA upon its discretion. The executive procedures of the rules are set by the board of directors of EGX after being ratified by the FRA. Additionally, EGX is obliged to provide the FRA with any data and documents, which the FRA requires regarding the financial instruments listed in the EGX.

Violations of Required Disclosure and Penalties

Violations of disclosure and penalties applicable thereunder are, generally, regulated under the Capital Market Law and its executive regulations. These applicable penalties are either imprisonment and/or fines. According to the Capital Market Law, such penalties are as follows:

  • without prejudice to any severer penalty stipulated in any other law, a penalty of imprisonment for a period not exceeding five years and a fine of not less than EGP50,000 or not less than the achieved profit or the prevented losses of the violator, and not exceeding EGP20 million or twice the realised profit or the prevented losses of the violator, whichever is greater; either penalty, shall be applied to any person who:
    1. engages in activities governed by the provisions of the Capital Market Law, without being licensed,
    2. offers securities or financial instruments, whether to public subscription, public offering or private offering, or receives, by any means, funds in relation to such financial instruments in a violation to the Capital Market Law or the decisions executing it,
    3. states, intentionally, in a prospectus, incorporation documents, licensing applications, or in any other reports, documents, and company public announcements, any incorrect information in violation to the provisions of the Capital Market Law, or altering such information after being ratified by the FRA,
    4. issues, intentionally, incorrect data/information in respect of the financial instruments subject to subscription of an agency, which is licensed to receive public subscriptions,
    5. lists securities or financial instruments in the EGX in violation of the Capital Market Law and its executive regulations;
  • a fine of an amount equal to EGP2,000 shall be applied, for each day of delay, in case of delaying in delivering the financial statements which is prepared in compliance with the rules of disclosure dealing with listing and de-listing of financial instruments referred to under Article 16 of the Capital Market Law; the head of FRA, or whomever delegated thereby, shall be entitled to settle/reconcile this offence, regardless its status, in return of paying the half of the payable fine. This reconciliation shall extinguish the criminal lawsuit in respect of such offense.
  • without prejudice to any severer penalty stipulated in any other law, a fine of an amount not less than EGP2,000 and not exceeding EGP2 million to whoever violates the provision of the executive regulations;
  • penalty of deprivation from exercising the profession, or exercising the activity in relation to which the offence was committed, may be applied for a period not exceeding three years – such penalty shall be, imperatively, applied in case of repetition;

It is worth noting that a criminal lawsuit for crimes/offences stipulated in the Capital Market Law may not be filed except at the request of the head of the FRA. The head of the FRA may reconcile these crimes/offences, regardless of their status, in return for an amount not less than twice the minimum of the applicable fine. This reconciliation shall extinguish the criminal lawsuit in respect of such crime/offence. The public prosecution shall suspend the execution of the penalty if there is a reconciliation which has taken place during its execution, even if the judgment is final.

Public Market v Private Market

The rules and procedures for trading in EGX guide line issued in February 2019 provide for equivalent terms such as: (i) open market – the public market in which the financial instruments/securities are listed, offered or traded in the EGX, and (ii) OPR market – the market in which the treasury bonds issued by the Ministry of Finance are listed.

Obtaining Legal Opinions

Legal counsels of the originator (ie, practitioners), during the process of offering tradable financial instruments, shall be obliged to undertake the following:

  • disclose the undertaken procedures of offering, in the prospectus, to ensure the company's obligations, claims, licences and any important clauses in respect of offering to the potential investors;
  • prepare the prospectus in accordance with the relevant laws and regulations, attached by supporting documents; and
  • declare and acknowledge the validity of the undertaken procedures of offering after its execution.

Furthermore, the prospectus in respect of securitisation bonds shall include:

  • a declaration of the legal counsel in relation to the securitisation process stating that:
    1. the securitisation portfolio is owned by the originator at the time of assignment,
    2. no cases or disputes affect the originator’s securitisation portfolio ownership, and
    3. the right of the originator to dispose the securitisation portfolio; and
  • a declaration that the assignment agreement (in respect of securitisation) is prepared in accordance with the provisions of the Capital Market Law and its executive regulations and that the assignment thereunder is enforceable, unfulfilled, unconditional and transfer all rights and guarantees assigned, unless otherwise stipulated that such subscription shall be fully covered by the subscription of the bonds.

The FRA is competent to follow up on the financial position of certain companies dealing in financial instruments to identify the adequacy of their financial resources which are required to meet and cover their financial obligations. Such companies are those which are participating in any of the following activities: (i) brokerage of financial instruments; (ii) dealing, intermediation and brokerage of bonds; and (iii) custody (licensed companies).

In this regard, the FRA issued decision No 14 of 2007 regulating the financial adequacy standards of licensed companies (Financial Adequacy Standards), whereby such companies shall abide with and apply these Financial Adequacy Standards. These Standards aim to measure the ability of licensed companies to face the risks related to their (i) activities, (ii) clients; and (iii) tradable financial instruments, in a way that increases the confidence of their clients.

Furthermore, licensed companies shall submit to the FRA and EGX the forms, reports and documents required under the Financial Adequacy Standards or other documents and data, which may be required by the FRA or EGX. EGX shall ensure the compliance of licensed companies with the Financial Adequacy Standards, and shall notify the FRA with any violations thereof.

Moreover, these Standards require a minimum issued and paid up capital of (i) EGP15 million for companies participating in brokerage activity (except companies which are licensed to participate in brokerage activity before the enforcement of the Minister of Investment decree No 314 of 2006, whereby its minimum issued capital shall be an amount of EGP250,000); and (ii) EGP10 million for the companies engaging in dealing, intermediation and brokerage of bonds; and custody activities. Noting that, the head of the FRA may increase this minimum issued and paid up capital according to the terms and conditions set by the FRA and the provisions of the Capital Market Law and its executive regulations. Additionally, licensed companies shall be obliged to retain a liquid net capital of at least 10% of their total obligations.

In case of non-compliance with the Financial Adequacy Standards, and as per the FRA website, necessary measures provided under the Capital Market Law, its executive regulations and the rules and decisions issued in respect thereof including the prohibition of practicing all or part of the licensed activities shall be applied accordingly.

Licensed companies, whether Egyptian or non-Egyptian, shall comply and abide with the Financial Adequacy Standards.

The Standards provide that licensed companies shall submit to the FRA and EGX the forms, reports and documents required under the Financial Adequacy Standards or other documents and data, which may be required by the FRA or the EGX to ensure the compliance of the licensed companies with the Financial Adequacy Standards.

In accordance with the Capital Market Law and its executive regulations, each company that issue financial instruments to public subscription shall submit to the FRA, at its sole responsibility, its:

  • semi-annual reports, regarding its activities and the outcome of its businesses; and
  • balance sheet and financial statements, attached with the reports of the company’s board of directors and auditor in relation thereon.

Additionally, the company issuing financial instruments and its auditor shall provide the FRA with the data and documentation which it may require to verify the contents of the prospectus, the periodic reports, data and financial statements of the issuing company. 

The EGX is obliged to submit to the FRA the data and periodic reports, as prescribed in the executive regulations, in relation to the trading of listed financial instruments thereunder. Such reports include (i) daily notification on trading, (ii) bi-monthly and monthly notification on trading, and (iii) annual notification on trading.

The material requirements of periodic reporting of companies issuing financial instruments to a public subscription are as follows.

  • Semi-annual reports: the reports shall include the data, which disclose and reflect the correct financial position of the company issuing financial instruments.
  • The company’s balance sheet and financial statements shall be: (i) prepared according to the accounting standards and auditing rules stipulated in or referred to it by the executive regulations, and (ii) attached with the reports of the company’s board of directors and auditor regarding such balance sheet and financial statements. The company issuing securities shall notify the FRA within the aforementioned one month prior to the convenience of its general assembly. Noting that, the company shall publish the summary of such financial statements, its clarifications and auditor’s report thereon by means of publication in accordance with the rules and regulations set by the board of directors of the FRA.

In accordance with the Capital Market Law, the FRA shall examine the documents submitted by the companies issuing financial instruments to public subscription or, otherwise, assign such examination to a specialised entity. The FRA, then, shall inform the issuing company with its observations and request that these documents be reviewed in accordance with outcomes of the examination. If the company does not respond to this request, it shall be obliged to pay the expenses of the FRA's publication of its observations and amendments as requested.

According to the Capital Market Law, a penalty of imprisonment and a fine of not less than EGP20,000 and not exceeding EGP1 million, or either penalty, shall be applied in case of non-compliance with the periodic reporting of the companies issuing financial instruments to public subscription and the EGX.

Companies engaging in the rating, classification and ranking of financial instruments (ie, rating companies) are regulated under the Capital Market Law and its executive regulations.

The executive regulations provides for certain requirements for rating companies, such as:

  • rating companies’ issued capital shall not be less than EGP500,000, fully paid upon incorporation;
  • companies dealing in financial instruments, banks, auditors, classified entities or its classified issued financial instruments shall not be a shareholder in rating companies;
  • rating companies shall avoid acting in conflict with its nature and neither the rating company nor its employees shall have an interest with the entity that is classified, issuing the bond or financing sukuk subject to classification;
  • rating companies shall not amend the credit rating rules and grades or its internal control rules and procedures stipulated in the executive regulations unless after obtaining the approval of the FRA;
  • the managing director of the rating company and its employees holding key positions shall have sufficient experience in securities classification field or in the field of credit analysis and creditworthiness study, in accordance with the conditions set by the FRA;
  • the credit rating certificate shall include the name of its issuing company, the date of the classification, its indication, an explanation of its intent, a statement indicating the significance of each of the other classification grades and comparing them with the corresponding grades with other companies engaged in the same activity, to ensure full and clear distinction between the different grades.

Additionally, the FRA also provides on its website for certain requirements which shall be observed by rating companies in order to be licensed by the FRA to participate in the rating, classification and ranking activities.

The FRA is the main regulator of the rating companies. A register at the FRA established for the registration of the rating companies, which are licensed to carry out financial evaluation and prepare studies to determine the fair value in all cases where the Capital Market Law or its executive regulations or the decisions issued for its execution are required. Noting that, such companies shall perform their role in compliance with the financial evaluation standards issued by virtue of the decision of the FRA’s board of directors.

For penalties on non-compliance, please see 4.1 Specific Disclosure Law or Regulations.

Securitisation is treated under the capital adequacy rules and regulations issued by the Central Bank of Egypt, which apply to all banks operating in Egypt. 

Specific Laws or Regulations Relating to Derivatives

There are no express legal provisions under Egyptian law that explicitly and directly govern transactions and trading in or using of derivatives in securitisations. Further, the legal relationships under these transactions have not been previously considered or tested, to the best of our knowledge, in front of Egyptian courts.

Although, the Capital Market Law and its executive regulations govern the establishment of futures exchanges in Egypt, subject to the approval of the FRA, in order to trade in contracts whose value derives from the value of financial or in-kind assets, price indices, securities, financial instruments or other indices determined by the FRA, whether in the form of futures, options, swaps and other standard contracts. In practice, the establishment of futures exchanges have not been implemented yet. EGX may establish a joint stock company to deal in futures exchanges activity. Additionally, it may engage in trading activity in respect of the contracts derived from financial instruments without the need of establishing the aforementioned joint stock company. As mentioned above, the establishment of the futures exchanges is subject to the approval of the FRA. It shall be established in the form of a joint stock company and enjoys a private juridical personality. The futures exchange’s articles of associations and by-laws shall be prepared in accordance with the forms set by the FRA. The rules, standards and structure of the futures exchange’s shareholders shall be determined by virtue of the decision of the FRA’s board of directors.

Penalties for Non-compliance

In addition to the penalties provided under 4.1 Specific Disclosure Laws or Regulations, the Capital Market Law provides that a fine of not less than EGP10,000 or not less than the realised profits or the prevented losses by the violator, whichever is greater; and not exceeding EGP1 million or twice the realised profits or the prevented losses by the violator, whichever is greater, shall be applied on any person who violates the rules issued or approved by the FRA regarding the futures exchange with respect to the terms, conditions and procedures for licensing the futures exchange.

The matter is not relevant in this jurisdiction.

The Egyptian legislator generally seeks to protect and encourage investors and the investment environment in Egypt. The Investment Law includes incentives to investors including the exemption in certain projects from the stamp duty tax, ratification and notarial fees in relation to the company's articles of association along with loans and any pledges for the first five years starting from the date of registration. However, the Investment Law does not apply to the companies working under the Capital Market Law, including securitisation companies.   

The Central Bank of Egypt (the CBE) issues authorisations for banks and entities to carry out banking activities, in accordance with the provisions of the Central Bank of Egypt Law (the CBE Law). The latter set out several restrictions on the form of banks and on capital requirements. Any bank authorised by the CBE may securitise a class of its receivables and issuing bonds to refinance these portfolios, subject to the approval and guidelines of the CBE. All banks are subject to the disclosure, credit risk retention, reporting and accounting requirements of the CBE, pursuant to the CBE Law, its executive regulations and the periodic circulars of the CBE. The subscription in any issued bonds under a securitisation transaction does not require specific type or form of entities and maybe subscribed by individuals as well.

The company undertaking the securitisation activity shall take the form of a company limited by shares established for this purpose with a paid-up capital not less than EGP5 million at the date of incorporation. Under Egyptian law, the company limited by shares is a form of company in which capital is composed of (i) quota or more owned by jointly liable partner(s), or (ii) equal value shares subject to the subscription of shareholder (or more). A prior approval from FRA is required in order to undertake securitisation activity and registration fees of EGP10,000 must be paid. 

As a general principal, the SPE or the securitisation entities are prohibited from carrying out any activities other than the securitisations activities. Securitisation activities are defined as "carrying out the activities of issuing tradable bonds in return of the financial rights and dues, along with any related securities, assigned to such entity". By way of exception, joint stock companies other than SPVs established for securitisation may submit a request to the FRA in order to issue securitisation bonds for a separate portfolio of their financial dues.

In order to issue the bonds as a result of the securitisation process, a notification addressed to the FRA re-issuing such bonds shall be submitted appended by a set of documents including either the prospectus and/or a notification to the FRA itself stipulating that the assignment shall not be valid and immediate until the portfolio is fully underwritten or subscribed.

Further, the SPE shall (i) provide a credit rating certificate providing its credit rating shall not be less that the required in order for the SPE to proceed with issuing the bond in return of the securitisation portfolio subject to such securitisation transaction, and (ii) deposit all the documents evidencing the assignment of the securitisation portfolio and amounts in favour of the bondholders.

All securitisation companies are subject to the Capital Markets Law and must be established in accordance with the form and requirements applicable thereunder. Any governmental entity may participate by establishing an affiliate entity in accordance with these requirements. 

All investors may invest and subscribe in the issuance of bonds under the securitisation transaction. Bondholders have the right to subscribe under an offering, and these bondholders may be individuals, companies, or other types of entities established under the law. 

The Capital Market Law states that the securitisation portfolio is transferred by the originator and the SPE under an assignment agreement. Such assignment must be conducted by virtue of an agreement in form and substance acceptable to the FRA. Furthermore, for the assignment agreement to be valid and enforceable, the assignment must be immediate and unconditional and must transfer all the rights, payments payable upon maturity and collaterals to the SPE.

Following the conclusion of the assignment agreement, there are no legal obligations on the originator in relation to the assigned debt. Unless otherwise agreed between the parties of the securitisation portfolio assignment agreement, the originator shall be required to act as an agent to the SPE in relation to collecting the debts on behalf of the SPE. Therefore, the originator is liable in its capacity as an agent.

The documentation used to effect securitisation transactions usually covers the following principal subject matters:

  • a description of the assets to be transferred;
  • the undertaking to transfer those assets;
  • the counter value (ie, the purchase price to be paid by the transferee in exchange for the transferred assets);
  • the method by which the transfer is effected;
  • the assignment itself;
  • servicing provisions; and
  • representations, warranties and covenants.

Besides the standard warranties, the originator under the securitisation portfolio assignment agreement typically makes the following representations and warranties:

  • that the originator owns the securitisation portfolio and all its related rights and securities;
  • that the securitisation portfolio is free from pledges and liens that would affect the interest of bondholders;
  • that it is not necessary for the originators' debtors to be notified of the securitisation portfolio assignment agreement;
  • that the rights and securities, subject of the securitisation portfolio, shall guarantee the rights (principle and return) of the bondholders;
  • that the originator has full authority to conclude, sign and execute the securitisation portfolio assignment agreement;
  • that the finance documents give a true, complete and fair view; and
  • that there is no litigation that would have a material adverse effect on the securitisation portfolio assignment agreement.

For the assignment of the securitisation portfolio to be duly and fully perfected, the SPE shall notify the FRA of the final securitisation portfolio assignment agreement, as well as publishing its summary in two widespread daily newspapers, at least one of them in Arabic within one week of the date of the agreement. Additionally, the FRA must approve the issuance of bonds by the securitisation company.

Typically, originators undertake the following covenants:

  • not to dispose of assets related to the securitisation portfolio;
  • to deliver, on the effective date of the securitisation portfolio assignment agreement, all contracts and documents evidencing the rights and receivables along with the relevant collateral subject of the securitisation portfolio;
  • to obtain and maintain all authorisations; and
  • to send notice to the SPE of the occurrence of certain events (eg, stop purchase event, change of control).

The general rule of servicing provisions is that the originator shall act as an agent on behalf of the securitisation entity in relation to collecting the debts from original debtors. Therefore, the originator may only be liable in its capacity as an agent. In this event, it is typical to include covenants covering these activities as well. Such covenants usually include the obligation to protect the rights of the bondholders, and to maintain all systems necessary for the collection and management of receivables. However, the parties to the securitisation portfolio assignment agreement may agree otherwise. In such case, the originator shall be required to notify its debtors by a registered mail with acknowledgement of receipt.

Typical default clauses in securitisation transactions include default in payments, breach of other obligations under the transaction documents, and the insolvency or bankruptcy of the securitisation entity.

Indemnities in securitisation varies and are subject to the negotiations between the parties of the securitisation transaction. Generally, the originator indemnifies the SPE in the following cases: (i) losses arising from a violation to the securitisation documents; and (ii) if the SPE discovers on the effective date of the assignment agreement that any of the rights constituting the securitisation portfolio subject to the assignment are not in conformity with the representation, warranties and covenants provided by the originator under the securitisation portfolio assignment agreement.

All principal matters regarding documentation have been dealt with in the subsections above.

The Egyptian law does not include specific provisions for an enforcement related to a securitisation portfolio. Enforcement is regulated across various laws depending on the asset and the type of collateral taken. Certain assets are of more concern in terms of the longevity of the enforcement proceedings and its efficiency. Long-term assets such as real estates and buildings would require a public auction and a final sale of fair consideration. Cash balances at banks and shares traded in the stock exchange have the most liquid nature and enjoys a high level of efficiency in terms of enforcement proceedings.

See above 6.1 Other Enforcements.

The issuer is usually the SPE whereby they create and issue tradable financial instruments in the form of bonds.

Sponsorship is not recognised or regulated under the securitisation regime in Egypt.

A placement agent is usually the broker who undertakes and assists the originator. Brokers cannot undertake any activities without obtaining the relevant licences from the FRA. Many banks and investment companies take the role of underwriters in securitisation transactions.

The servicers are usually the originators in Egyptian securitisation transaction. They are responsible for collecting the cash under the pool of assets and reporting any events of default.

Investors can have access to securitisation transactions through different vehicles, such as funds and companies. The most usual form is a joint stock company established and regulated in accordance with the provisions of the Capital Markets Law. Different structures can be adopted to establish layers of companies, while it remains a necessity to comply with the provisions of the Capital Market Law in this respect.

The concept of trust is not recognised under Egyptian law. However, custody is recognised and regulated. The custodian under the securitisation transaction usually undertakes the same roles of the trustee which includes but are not limited to and subject to the instructions of the originator: (i) safekeeping the pool of assets; (ii) reviewing the portfolio; (iii) preparing periodical reports to the bondholders; and (iv) taking the required legal procedure in the event of default of any of the obligors. In addition, the custodians may not perform any custody activities without obtaining the FRA’s required licence.

Synthetic securitisation is not particularly regulated under Egyptian law and would not be permitted in light of the existing provisions that govern securitisation.

See above 8.1 Synthetic Securitisation.

See above 8.1 Synthetic Securitisation.

See above 8.1 Synthetic Securitisation.

See above 8.1 Synthetic Securitisation.

See above 8.1 Synthetic Securitisation.

Securitisation transactions are not prevalent in Egypt, although the market is growing and the current financial atmosphere is promising, with expansion expected in the near future. The limited number of transactions involved are mainly short-term bonds backed by consumer card receivables.

Please refer to 9.1Common Financial Assets, above.

Matouk Bassiouny

12 Mohamed Ali Genah
Garden City
Cairo
Egypt

+2 02 2796 2042

+2 02 2795 4221

info@matoukbassiouny.com www.matoukbassiouny.com
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Law and Practice in Egypt

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Matouk Bassiouny is a full-service independent law firm based in Cairo, Egypt, with offices in UAE and Sudan. It specialises in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and business in Egypt and the region. The team of 18 partners and over 145 lawyers are trained both locally and internationally and are fully conversant in English, Arabic, and French. The firm's finance and projects group’s primary goal is to provide clients with legal advice on the banking and finance sector in Egypt as well as on the strengths and weaknesses of security available to lenders in the Egyptian market. The finance and projects group maintains close relationships with Egyptian financial institutions, which enable it to have first-hand knowledge of what constitutes commercially acceptable solutions for the major institution involved in large-scale deals.