Introducing unrated bond and Sukuk to the Egyptian Capital market 

From MENA to the WORLD

With Suzan Taha

In a recent interview with LegalcommunityMENA, Mahmoud Alaraby (pictured), Partner and Co-Heading the Capital Markets Department at ALC- Alieldean Weshahi & Partners, discussed the recently introduced major amendment byThe Egyptian Financial Regulatory Authority (“FRA”) to the Stocks Listing and Delisting Rules with the Egyptian Stock Exchange (“EGX”).  

What is the amendment made by the Egyptian Financial Regulatory Authority to the Stocks Listing and Delisting Rules with the Egyptian Stock Exchange? 

On February 6, 2023, the Egyptian Gazette published significant amendments to the Stocks Listing and Delisting Rules, which came into force the following day. These changes were aimed at enhancing the Egyptian stock market by increasing the number of bond issuances and addressing certain procedural rules through amendments or deletions. One noteworthy change introduced by the FRA is the permission to issue bonds and Sukuk without the requirement for credit ratings. Unrated bonds are now allowed in Egypt under certain conditions. 

What is the purpose of this decree and the conditions that apply to the issuance of unrated bonds and Sukuk? 

The decree allowed for the issuance of unrated bonds, subject to two conditions. The first condition pertains to the nature of the investor, and the second relates to specific procedural rules. Only sophisticated investors are eligible to subscribe to unrated bonds and Sukuk. The term “sophisticated investors” is defined by a 2016 decree and includes financial institutions, insurance/reinsurance companies, venture capital and private equity fund companies, and companies subject to the supervision and review of the FRA, among others. Additionally, public legal bodies, insurance and pension funds, companies with a capital of at least one million Egyptian pounds, and natural persons meeting certain experience and ownership criteria are also considered sophisticated investors. 

What are the procedural rules that apply to the listing and delisting of unrated bonds and financing Sukuk? 

For the listing and delisting of unrated bonds or financing Sukuk, limited to financial institutions and sophisticated investors, certain conditions must be fulfilled. These conditions include ensuring that the remaining period of the required bonds or Sukuk to be listed is not less than one year from the date of listing and that no default has occurred in relation to the bondholders’ payment obligations. The maximum value of the bonds or Sukuk should not exceed the net assets of the company, as per the last approved financial statements.  

Additionally, specific documents, such as a certificate from the company’s auditor confirming the company’s ability to fulfill its obligations to bond or Sukuk holders, and an undertaking from the company’s legal representative to form a group of bond or Sukuk holders within three months from the listing date, need to be submitted. 

How do you expect this amendment by the FRA to impact the market for unrated bonds and Sukuk? 

This change should encourage more players in the market to issue new type of unrated bonds/sukuk. While it is yet to be seen how the market, in these challenging time the Egyptian economy is facing, yet we believe it would be positive. 

Sophisticated investors have always argued that they have the experience and capacity to assess their investments in bonds and there was, in their view, no need for the rating process. This, in their view, would save time and cost. 

As for the sukuk market, which is a relatively new market, less than 10 issues to date. This change might have a bigger impact.   

How does this decree interact with other laws and regulations? 

The FRA’s decree is part of a broader package of amendments to laws and regulations aimed at enhancing the Egyptian economy. These amendments complement each other, including changes made to the Capital Market Law, Companies Law, Market Control and Non-banking Financial Instrument Law, and FRA Board Decree issued in 2016 concerning the issuance of unrated financial instruments. 

About Mahmoud Alaraby 

Mahmoud Alaraby is a Partner and Co-Heading the Capital Markets Department at ALC- Alieldean Weshahi & Partners. Alaraby acquired extensive experience in securitization, capital market, restructuring and banking and finance and participated in several merger and acquisition transactions during the past 15 years. 

Alaraby acted as lead advisor on the issuance of more than 40 securitization bonds in the Egyptian market and worked side-to-side with the regulator “Financial Regulatory Authority (FRA)”in respect to different financial products in the capital market field. He has extensive experience in conducting legal due diligence and risk assessment in several fields of business including non-banking financial activities and real estate. 

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