CAIRO: Minister of Investment Mahmoud Mohieldin has simplified the procedures for private companies to issue bonds, medium and long-term bonds in particular.
Amending Capital Markets Law no. 95 of 1992 is meant to benefit private companies with easier access to capital.
The minister’s decision follows an announcement last week from telecom operator Mobinil, that it will issue the first of several five-year bonds, eventually comprising LE 1.5 billion in total.
Investment bank EFG-Hermes, the underwriter of the bonds, stated that the capital generated by their issuance will “be used to finance the extension of its network.
“It is probably the first in Egypt’s history to be distributed outside the banking sector, Karim Awad, head of EFG-Hermes, told Reuters.
He explained that the bonds will have a fixed annual yield as 12.25 percent, payable every six months, and added that they will be marketed to non-bank financial institutions inside and outside Egypt.
“The bond issue will probably close by the end of January, he added.
Mobinil has issued bonds following the decision of the Central Bank of Egypt (CBE) to block its access to bank loans, as the company is a subsidiary of Orascom Telecom, which currently has received several loans. Egypt’s legal framework prevents banks from loaning more than a certain portion of their total loans to a single client.
Chief Executive Officer Hassan Kabbani told Reuters that he hoped the issue would be traded on the secondary market. “That depends on liquidity, of course, he said.
Mobinil has therefore successfully issued bonds; although their appeal has yet to be proven, it is likely their issuance will be met by several offers. However, the procedures involved have prevented other companies from taking a similar initiative, a barrier that the minister’s recent amendment will help address.
The emphasis on medium- and long-term bonds addresses an oft-referenced problem facing Egypt and developing markets in general: the need for capital in general, and secure capital in particular.
Examples of other developing markets decision to open or assist their bond markets demonstrate the benefits gained by bonds. A recent study in Sri Lanka, an economic system at a similar stage of development to Egypt’s, lists the benefits as “improved efficiency of the capital market by lowering spreads, extending maturities, and raising the return on long-term investment portfolios.
The study in Sri Lanka ascribes to the mentality of the World Bank, which recommends the issuance of bonds as a way for developing countries to increase their access to capital.
Bond issuance is in vogue all over the world at the moment, as banks remain wary of granting loans. Simon Kitchen, senior economist at EFG-Hermes, referred to a “global trend of bond issuance. “Because banks globally are perhaps reluctant to lend, then some companies are going directly to the bond market, Kitchen said, as quoted by local news.
According to the CBE website, lending by Egyptian banks to non-government companies fell 1.3 percent from October 2008 to October 2009.
In addition to Mobinil, car manufacturer Ghabbour Auto has announced its intention to issue bonds.
Bond issuance will be regulated by the Egyptian Financial Services Authority, and follow the procedures laid out in the newly amended Capital Market Law no. 95 of 1992.
The Capital Market law has seen numerous amendments as Investment Minister Mohieldin carries out economic reform. Described as “the backbone of the legislative structure of the Egyptian financial market, the flexibility of the law has made it a vehicle for easing regulations in other areas.
Decrees by Mohieldin amended the law in order to simplify procedures for investors and executive regulations in 2004, for example, and mutual funds in 2007.
Mohamed Omran, economist and independent consultant, told Daily News Egypt, “I think the government is pursuing beneficial policies for the most part in stimulating capital and hopefully benefiting individuals by creating jobs, he said.
“However, I disagree sometimes with simplifying procedures and regulations across the board. He explained that attempts to simplify or deregulate can unduly increase risk to the lender or bond holder.
“Perhaps if the simplification is a temporary move aimed at stimulating capital flows. it’s not good to over-simplify a banking system, he concluded.
