Securitization is a relatively new finance technique in Nigeria. Global Banking & Finance Review spoke to Samuel Anani, Corporate Finance Analyst at DLM Advisory Partners about their role in facilitating the second future flow securitization in the Nigerian Capital Market on behalf of their clients Primero Transport Services Limited.

Recently, you arranged and issued a second future flow securitisation in the Nigerian Capital Markets with the securitisation of Primero Transport Services Limited’s (“PTSL”) Bus Rapid Transit System (“BRTS”)ticket receivables, under a N100 billion medium term bond programme. So how was the exercise?

The exercise required a critical assessment of the potential profitability of the business and then, we needed to find a way to legally isolate its cashflows, noting the needs for operational cashflows. We achieved this by an assignment of the company’s future cashflow into an SPV. The cashflow from the sale of receivables was then used to pay down existing expensive debt. In addition, by separating the buses from the operating balance sheet of the company we were able to begin to redress the negative balance sheet position which came about from the high depreciation charge on the buses.Although it was tasking, the success of the deal is already beginning to have adirect impact on the lives of the average Lagosian.

Why was the securitisation necessary?

The securitisation isolates the borrower’s receivables,and this also applies to the cashflows of those receivables. This essentially gives the investor first charge over those cashflows, further securing the investment and making default entirely dependent on the performance of the receivables as opposed to other factors tied to the sponsor.The securitisation was also necessary to reduce the cost of borrowingby achieving a higher rating than a plain vanilla balance sheet bond issue.

Did it achieve the desired results? 

Yes, it did. PTSL needed to increase the number of operating buses and reduce its spare ratio to improve daily cash accruals. Since the bond issue, there has been reported increase in the amount of buses deployed to serve the bustling population of Lagos.In addition, given the current ban on commercial motorcycles and tricycles in the state, Primero operating at optimum capacity has never been more important.

What is the area of coverage of the BRTS? 

It has a total of 27 stops which run from Ikorodu to Tafawa Balewa Square(35.5Km) in Lagos.

 The future flow securitisation was expected to allow BRTS monetise its existing and predictable cash flows from ticket sales receivables generated in the ordinary course of business. How successful has this been?

It has been very successful. The whole transaction is dependent on Primero BRT Securitisation SPV Plc being able to realise cash from the purchased future flow receivables and as such it is imperative that PTSL uses the amounts raised to ensure that the receivables deliver more than enough cash to service the bond.

 Has Primero BRT Securitisation SPV Plc (“PBSP”) who is the issuer been able to meet principal and interest payment obligations owed to investors so far?

Yes, it has. PBSP has met its first semi-annual payment of interest and principal under the bond issue.

Primero BRT Securitisation SPV Plc was set up to purchase the BRTS ticket receivables from PTSL, securitise and sell under a bond issuance programme. How well has PBSP played its role?

PBSP’s role was to raise funds to buy the receivables and then pay off the liability using cash from the purchased receivables. Payments are being made on schedule; it is performing well.

 What has not worked well in the second future flow securitisation?

The business of transportation depends on volume because the more buses we have, the more the cashflow. Due to short term repairs and maintenance, some buses can be off the road from time to time, which leads to reduced cash collection. The transaction structure however provides for a bus replacement reserve and a maintenance reserve to ensure that there is always cash to meet these obligations.

So, what needs to be done now?

The next step will be to de-leverage the company via capital injection and plan for funding the next routes with much lower gearing and an economically viable cost of funds.