BusinessDay 05 Apr 2018

Thursday 05 April 2018
18 BUSINESS DAY
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Q1’18: NASD grows value,
volume of securities traded
… First review of OTC securities to hold this month
IHEANYI NWACHUKWU
In the first quarter
(Q1) of 2018, NASD
reported growth in
trading activities
on the Over-The-
Counter (OTC) market for
unlisted securities. The OTC
market recorded 112percent
increase in value of stocks
traded from N1.61 billion
in Q1 of 2017 to N3.59
billion in Q1 2018. NASD
OTC Securities Exchange
continues to play a leading
role in transparently creating
liquidity for shareholders in
securities of unlisted stocks.
Also recorded was
45percent increase in
volume of unlisted securities
traded from 239.93 million
units in Q1 2017 to 351.96
million units in Q1 2018.
Interestingly, in the
review Q1’18 period Central
Securities Clearing System
(CSCS) Plc led the market by
volume traded, as investors
traded 218 million units
of its shares in 180 deals,
while Afriland Properties Plc
followed as 67 million units
of its share were traded in
49 deals.
Central Securities
Clearing System Plc led the
market by value traded,
trading shares worth
FMDQ Learning
N1.8 billion, followed by
Niger Delta Exploration
& Production Plc with
transactions worth N1.09
billion.
The NASD OTC market
ended the trading week
to March 29 2018 with an
increase as its Unlisted
Securities Index (USI)
increased by 0.15percent
and closed at 663.82 points
as against 662.80 points the
preceding trading weekend.
Consequently, total market
capitalisation gained
0.15percent last week and
closed higher at N449.23
billion compared to N448.53
billion the preceding Friday.
The NASD will on Friday
April 27, 2018 conduct a first
review of all securities on the
OTC market. The review is in
line with the OTC Securities
Exchange efforts to promote
transparency in this market.
Last year, NASD OTC
Securities Exchange
commenced a classification
of admitted securities into
categories that reflect the
level of financial disclosure,
adherence to corporate
governance standards,
dematerialisation of shares
and liquidity of the 36
securities trading on the
OTC Market. At the end of
this exercise, Twelve (12)
securities were ranked in
the ‘Blue Category’, Eight (8)
in the ‘Pink Category’, and
Fifteen (15) were in the ‘Red
Category’.
“This review will update
the categorisation rankings
in response to changes
in compliance levels. We
believe that this service will
enhance transparency on
the inherent value in such
companies, improve levels
of investor confidence and
also, improve activities on
the OTC Market”, NASD
noted.
Global IPO outlook remains robust
after promising first-quarter results
Despite geopolitical
uncertainties and
market volatility,
global IPO activity
in the first three months of
2018 posted strong results
to start the year. Global IPO
markets raised $42.8billion
in first-quarter (Q1) 2018,
a 28percent year-over-year
(YoY) increase on Q1 2017.
However, with 287 listings
this quarter, volume was down
27percent YoY compared with
Q1 2017, when it produced the
highest number of listings for
first quarter IPOs since 2007.
These and other findings were
published in the EY quarterly
report, Global IPO trends:
Q1 2018.
“Global growth in IPO
proceeds outpaced deal
numbers in a relatively
strong first quarter. Driven
by larger transactions, global
IPO activity started out with
a strong increase in proceeds
in what is traditionally
the slowest quarter of the
year, despite a decline in
deal numbers”, said Martin
Steinbach, EY Global and
EMEIA IPO Leader.
“However, market volatility
in February did slightly
dampen investor confidence,
slowing momentum gained
from calendar year 2017,
the highest performing 12
month period since 2007.
Looking ahead, the outlook
remains positive in many
markets around the world
and we expect to continue
to see IPOs from a range
of sources including large
tech, high growth, crossborder
listings, carve-outs
and state-owned enterprises,”
Steinbach stated.
In the remaining part of
2018, the outlook for IPO
looks to be promising, driven
by strong equity markets and
sound corporate earnings.
This is despite expected
interest rate hikes later this
year and uncertainty around
potential trade policies.
Steady investor confidence
is encouraging a healthy
pipeline across sectors and
markets this year.
Americas IPO activity
started out on a high in the
only region up over Q1 2017
in terms of proceeds and
number of deals. There were
44 IPOs in the Americas in Q1
2018 raising $15.4billion, an
increase of 29percent in terms
of volume and 22percent by
proceeds compared to Q1
last year.
US IPO activity accounted
for 36 IPOs raising US$12.8b,
up 44percent in terms of
volume and 17percent by
proceeds compared with Q1
2017. Additionally, five of
the top ten global deals were
featured in the US. Three
of the top ten deals on US
exchanges were also crossborder.
In total, US exchanges
accounted for 41percent of all
global cross-border activity
in Q1 2018 compared to
35percent in Q1 2017.
“The first quarter of 2018
built strong momentum for
the US IPO markets. Both the
volume of deals and capital
raised are significantly up
from recent years, in large part
due to strong performances
to start the year in January.
Positive IPO performance
to date provides a strong
backdrop for continued
issuance, though potential
uncertainty surrounding
mid-term elections could
present risk in the second half
of the year,” said Jackie Kelley,
EY Americas IPO Markets
Leader.
Introduction to Securitisation
Securitisation refers
to the issuance of
securities that are
backed by a pool
of assets. The
process involves the pooling
and repackaging of similar
financial assets (which on
their own may be illiquid
(that is difficult to trade))
into a new (consolidated)
financial security which
is subsequently sold to
investors. The pooled
assets are typically sold (or
transferred) to a specially
created third party (a Special
Purpose Vehicle (SPV)),
which uses them as collateral
to issue securities in the
capital market.
Assets with a stable cash
flow (such as corporate
and sovereign loans,
mortgage loans, consumer
credit, project finance,
lease/trade receivables
and individualised
lending agreements) can
be securitised. However,
securitised assets are
generally classified into assetbacked
securities (ABS) and
mortgage-backed securities
(MBS).
ABS are securities created
from the pooling of nonmortgage
securities such
as credit card receivables,
home equity loans, student
loans and auto loans, whilst
MBS are created from the
pooling of mortgages.
Both classifications entail
the purchase of a pool of
financial assets by an ‘issuer’,
who structures the pooled
assets into asset-backed or
mortgage-backed securities
for onward sell to investors.
The fundamentals of ABS
and MBS will be conferred in
the April 2018 edition of the
FMDQ Spotlight.
Parties involved in
Securitisation
A securitisation
transaction involves various
parties. Highlighted below
are some of the major parties
and their unique roles.
Originator: A financial
institution that initiates
securitisation transactions
by pooling assets on its
balance sheet and selling
them to an SPV created for
the securitisation purpose
Special Purpose Vehicle:
A legal entity established
to acquire and hold the
pooled assets on behalf of
the investors. The SPV is
essentially the issuer of the
securitised assets sold to the
investors
Rating Agency: An
institution that assesses and
assigns credit ratings to the
pooled assets, based on their
credit quality and ability to
meet payment obligations as
and when due.
Servicer: An institution
that performs administrative
duties (such as mailing and
billing statements, collecting
payments and supervising
delinquencies) on behalf of
the SPV.
Trustee: A financial
institution that ensures
that money raised from
the securities issued is
transferred from the Servicer
to the SPV, and that investors
receive their payments
in accordance with the
contractually agreed period.
Third-party Credit
Enhancer: A creditworthy
third-party (typically a
specialised insurer) that
guarantees securitised
products.
Liquidity Provider: A
bank which provides the SPV
with necessary cash to avoid
any unsteadiness of cash flow
to the investors
Investor: Corporate
institution, bank, pension
fund administrator, insurance
company or investment
fund manager who buys the
securities issued by the SPV.
The investor receives payouts
per the coupon rate of
the securitised investment.
The Securitisation
Process
The basic form of a
securitisation transaction
entails two (2) steps:
(A). A company (the
originator) with loans or other
financial assets identifies
the assets to securitise, and
pools these. The originator
subsequently transfers (or
sells) the pooled assets to an
issuer (the SPV) established
for the securitisation
purpose.
(B). The issuer finances
(pays) for the acquisition
of the pooled assets by
issuing securities (backed
by the collateral of loans/
receivables in the reference
portfolio) such as an ABS
or MBS to capital market
investors. Subsequently,
the investors receive fixed or
floating rate payments from
a trustee account funded
by cash flows generated by
the assets in the reference
portfolio.
Depending on the
structure of the transaction,
securities issued on
the same collateral pool
may carry different credit
ratings. A senior tranche
could have a relatively lower
risk, compared to a junior
(or subordinate) tranche.
This is because the senior
tranches receive overcollateralisation
protection
such that in the event of a
default, obligations to the
senior tranches must be
met first, before the junior
tranches are considered.
Continues next week