Overview

In Nigeria, securitisation is an emerging financial and capital market concept receiving attention from various participants in the Nigerian economy. It is a method that enables governments and companies to convert long-term assets or illiquid assets into cash through the issuance of securities backed by those assets. In the place of traditional borrowing, securitisation offers entities alternative financing sources to address cash flow needs and manage operating and credit risks. Despite its adoption, there is currently no specific legislation that creates a general regulatory framework for securitisation in Nigeria, and previous efforts by different institutions to address this have not been successful.

Existing regulations are sector-specific, including:

• the Securities and Exchange Commission (SEC) Rules on Securitisation 2015 (as amended) (the “SEC Rules on Securitisation”), which enable companies to issue tradable securities backed by assets;
• the Central Bank of Nigeria (CBN) Revised Guidelines for Finance Companies 2014 (the “Revised Guidelines”), allowing finance companies to engage in debt securitisation; and
• the Asset Management Corporation of Nigeria Act 2010 (as amended), which facilitates the securitisation of eligible bank assets to rehabilitate distressed financial institutions.

The absence of a specific federal law regulating securitisation may contribute to the moderate development of securitisation as a financing mechanism in Nigeria, considering this leaves room for uncertainty regarding permissible practices, structuring, and taxation. Other contributing factors may include associated risks, transactional costs, and complexities. This article provides an analysis of the recent trends and developments regarding securitisation in Nigeria.

Current Position

Nigeria is experiencing a growing interest in securitisation across both public and private sectors. By way of example, the Financial System Strategy 2020 (“FSS2020”) Secretariat, which is responsible for accelerating the development of the Nigerian financial system, has proposed legislation to facilitate securitisation in Nigeria and recommends drafting a Securitisation Bill for presentation to the National Assembly. As securitisation increasingly serves as a financing option for infrastructural development, in February 2024, Chapel Hill Denham finalised a USD7.4 million securitised financing agreement with d.Light, a key provider of household electricity solutions for under-represented and low-income families in Nigeria. The deal aims to fund off-grid solar projects nationwide, providing cost-effective solar-powered products to enhance access to affordable and sustainable energy. Expectedly, the growing recognition of securitisation as a viable financing mechanism is driving notable trends in its practice and adoption in Nigeria. Other than the above-mentioned limited regulatory interventions, companies rely on the general laws and regulations (including common law and the principles of equity) to engage in securitisation transactions.

Key Trends and Developments

Securitisation as a debt management mechanism

In May 2023, Nigerian federal law-makers approved the Federal Government of Nigeria (FGN)’s proposal to securitise NGN22 trillion Ways and Means Advances made to the FGN by the CBN. By way of background, the Ways and Means Advances is a financial policy that allows the FGN to request loans from the CBN to address emergency financial issues, such as revenue shortfalls. Under the securitisation structure for the Ways and Means Advances, the FGN will issue securities to the CBN to securitise the Ways and Means. Accordingly, unlike most securitisation transactions, the securitisation arrangement between the FGN and the CBN is not aimed at fundraising but as a means of managing debt and extending repayment timelines.

According to a report from the Nigerian Debt Management Office, the securitisation has a tenor of 40 years with a 3-year moratorium period. The securitisation will reduce the debt service cost of the FGN, as the new interest rate is 9% per annum instead of the monetary policy rate plus 3% charged on the Ways and Means Advances. These significant savings arising from the lower interest rate will help reduce the budget deficit and, presumably, the new borrowing level of the FGN. The securitisation is expected to improve debt transparency, as the securitised Ways and Means Advances will now be included in Nigeria’s public debt statistics and will lessen the burden on Nigeria’s debt-service-to-revenue ratio – as well as its overall debt burden – and free up more funds for operational needs of the FGN.

Future flow securitisation

CERPAC Receivables Funding SPV Plc led the first successful future flow securitisation transaction in Nigeria in 2017. This transaction involved the securitisation of the CERPAC receivables due to Continental Transfert Technique Limited (Originator), a technical partner to the FGN on the CERPAC project, through the establishment of a NGN25 billion medium-term note programme.

FGN proposed securitisation of dividends

More recently, the FGN has expressed intentions to pursue the securitisation of future flow receivables as a financing alternative. Reports indicated plans by the FGN to securitise approximately USD7 billion in dividends receivable from Nigerian Liquefied Natural Gas Limited. The FGN anticipates receiving these funds through a consortium led by Standard Chartered Bank. The FGN will reportedly use the funds to address the foreign exchange backlogs and stabilise the naira. This move is crucial for Nigeria’s monetary policy and economic stability for several reasons. Details of the securitisation deal (such as the tenor and other terms and conditions) are not fully public yet, but the expected impact on the economy is positive.

Securitisation of transport income

Future flow securitisation is gaining momentum among companies in the private sector. Following the CERPAC receivables securitisation, Primero Transport Services Limited (PTSL) securitised its Bus Rapid Transit System ticket receivables in 2019. Under the securitisation transaction, Primero BRT Securitisation SPV Plc was incorporated as the issuer to acquire ticket receivables from PTSL and securitise the receivables through a bond issuance programme. PTSL operates under a concession from the Lagos state government to provide bus services across the state.

By securitising its transport receivables, PTSL aimed to secure funding to expand its operational capacity and deploy more buses across its routes. The securities generated significant interest among domestic institutional investors, resulting in over-subscription. To enhance the creditworthiness of the special purpose vehicle and the instruments issued, several credit enhancement measures were implemented, including over-collateralisation, a cash reserve, a liquidity facility via a standby letter of credit, and a guarantee from a commercial bank in Nigeria. The securities were dual-listed on both the Nigerian Exchange Limited and the FMDQ OTC Market, providing investors with improved accessibility and liquidity.

Other asset class-backed securitisation

Asset-backed securitisation is supported by the SEC Rules on Securitisation. This relates to a company creating tradable securities backed by its illiquid assets. This method of securitisation has yet to gain wide acceptance as envisaged since the issuance of the SEC Rules on Securitisation. It is difficult to attribute any reasons for the prevalence of future flow securitisation over asset-backed securitisation such as loan or mortgage receivables. In the authors’ view, it is likely because – in the case of future flow securitisation – there is expected revenue during the tenor of the security if the business remains operational, unlike in the case of a loan or mortgage-backed securities with higher risks of default if the borrower or mortgagor fails to perform their respective obligations.

Securitisation of diversified payment rights

Although a form of future flow securitisation, diversified payment rights (DPRs) are peculiar because they relate primarily to foreign remittances, including current and future foreign currency collections and electronic payment processing fees. Securitisation of DPRs previously received consideration from institutions in Nigeria and was a trend across some other African countries. By way of example, in 2001, the African Export-Import Bank arranged a USD50 million remittance-backed syndicated note issuance facility in favour of a Nigerian entity using Moneygram receivables. Securitisation of remittances and DPRs has generally not been as consistent as expected, owing to Nigeria’s relatively developing financial system. However, recent trends indicate that Nigerian banks are revisiting the securitisation of receivables (including remittances) to enhance foreign exchange liquidity. Despite the issues that may negatively affect remittance securitisation in Nigeria, such as foreign exchange control requirements and taxation, the possibility is still very likely.

Nigeria consistently ranks among the highest globally for remittances, which contribute significantly to its economy – accounting for nearly 6% of its GDP at certain points in the past five years. Banks and other financial institutions can maximise this steady stream of cash flow and the receivables associated with effecting remittance transactions to meet short to medium-term business needs.

One of the main concerns affecting the viability of remittance-based securitisation is that many of the transactions sometimes pass through informal channels, largely owing to the disparity between the official exchange rate and the unofficial exchange rate. With the further liberalisation of the Nigerian foreign exchange market, which has resulted in the convergence of both rates now, and the emergence of several financial technology companies offering remittance-based services, inbound money transfer services and a seamless remittance process (and with these companies having partnerships with many Nigerian banks), it is increasingly possible to address the concern around the use of informal remittance services and expand the remittance net. Consequently, it is possible to develop, identify and organise expected receivables from remittance transactions, structure expected cash flow, and facilitate the issuance of remittance-backed securities.

Real property-based securitisation

Mortgage-backed securitisation is relatively prevalent in Nigeria. Although the government aims to play a significant role in this market and facilitate mortgage-backed securitisation transactions to improve housing availability in Nigeria and ensure constant liquidity, many of these transactions have come from private institutions operating in the real estate sector. As recently as 2020, the Nigeria Mortgage Refinance Company (NMRC) – a private-sector public company dealing primarily in mortgage refinancing – successfully issued a NGN10 billion Series 3 bonds to boost liquidity in the Nigerian mortgage market. The NMRC issued a NGN11 billion Series 2 bond two years prior to 2020. Both bond issuances were over-subscribed. These issuances were made under the NMRC’s NGN400 billion FGN Guaranteed Bond Issuance Programme, highlighting the relevance of this fundraising method, especially in Nigeria’s housing and financial sectors.

Property equity securitisation

In addition to mortgage-backed securities and other property debt securitisation schemes, property equity securitisation is another growing trend in Nigeria. Under this structure, different properties are pooled together into an asset class, and notes are issued on the value of the asset class. The notes issued give the noteholders some equity in the property based on the value of the note. Consequently, this entitles the noteholder to a portion of the income from the asset class, which would usually be primarily rental income. Although this form of securitisation is property-based, it also incorporates an element of future flow, as it relies on anticipated income from the properties.

Finance companies’ involvement in securitisation

The CBN regulates finance companies in Nigeria and prescribes the permissible activities that these companies may be involved in and what business they may undertake. Under the Revised Guidelines, finance companies are permitted to undertake the business of debt factoring and debt securitisation. The Revised Guidelines define “debt factoring” as purchasing debts or receivables at a discount and profiting from their collection, whereas “debt securitisation” is defined as transforming identified pools of contractual debt into marketable securities (such as bonds) through suitable cash flow repackaging. The Revised Guidelines empower finance companies to undertake securitisation transactions in Nigeria. In this regard, finance companies are expected to play a critical role in securitisation transactions as securitisation picks up pace in the Nigerian securities market.

Conclusion

Securitisation in Nigeria is a developing practice. Notably, the development of securitisation in Nigeria requires some degree of legal certainty around various underlying issues, such as the responsibilities of players, protection of investors, taxation, and enforcement in the event of default. A securitisation law will be helpful in this regard to address some of the contending issues. As the demand for financing grows and the costs of obtaining loans from financial institutions rise, companies are likely to increasingly view securitisation as a viable tool for raising funds and managing debt in the long term. While recent trends may indicate a preference for future flow securitisation, other forms of securitisation have not been phased out and are taking shape in the Nigerian capital markets.