Sunday, May 28, 2023

Credit Rating to precede securitisation

The Botswana Stock Exchange (BSE) said this past week that preparations are being made in earnest for the introduction of securitized products. BSE Product Development Manager, Thapelo Tsheole, said on Friday that the domestic bourse is busy making arrangements to sensitise the market on the need for credit rating.

“We will be holding a conference on the 10th of July whose focus would be on credit rating. Our aim is to create a credit rating for domestic firms in order to give even confidence when investing in certain institutions. Right now investors don’t know risks of stocks they are picking,” he explained.
He emphasized on the need to rate debt instruments, admitting that it is amiss that none of the listed bonds have credit rating.

“In order to securitise any asset, it is important to first rate such instrument in order to determine their risk. Investors have to know the likelihood of being paid,” he explained. As part of its strategy to increase the breadth, liquidity injection and diversity of instruments traded in the bourse, the BSE is aiming at introducing a number of investment vehicles. Amongst others in advanced planning stages are Exchange Traded Funds (ETFs), Securitised Products and Contracts for Difference (CFDs). Of the above, securitized products are the most contentious as they are molded in the same breadth as instruments that caused global financial crisis of sub-prime mortgage. Currently, the global market is cautious with regard to trading securitized products after taking a beating at the hands of sub-prime mortgage.

“We are fully aware about the impact sub-prime crisis has caused that is why we want to start sensitizing the market now about structuring such products. We don’t expect the institutions to immediately transact such instruments. Again, we cannot say we are going to wait for the sub-prime impact to cool down before teaching the market about this products,” he explained, adding that projections are that going forward, the global financial market would start appreciating securitized products. In its latest annual report, BSE says the domestic debt market is generally illiquid and inactive despite insatiable appetite from investors. This is largely due to lack of diversity in products and depth of the market.

“Demand for debt instruments has been high as evidenced by the oversubscription of the bond issues over the past few years,” says the report, further noting that government bond offer was over subscribed by 500 percent.
The focal point of securitization, the report says, is to encourage banks and other financial institutions to structure securities, utilizing otherwise illiquid assets which can be listed and traded in the BSE.

“The assets for securitization could include residential mortgages, auto-mobile loans, credit card receivables, leases or any conceivable financial asset,” says the report.


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