IFC Offers Innovative Product to Expand SME Finance in South Africa
Building on a relationship with a financial institution with a strong small business client base, IFC financed a securitization program with South Africa’s Mercantile Bank to allow it to expand its equipment rental contracts. The landmark transaction is the first of its kind in the sector for IFC in Sub-Saharan Africa.
Rental asset finance allows businesses to rent the equipment they need to operate, rather than purchasing it and tying up capital. The contracts originate from Custom Capital, a rental finance company majority owned by Mercantile Bank, and targets mostly small and medium sized enterprises.
Custom Capital until now has relied on Mercantile Bank to provide funding for growth. The securitization program will help it access South African capital markets and long-term cost-effective funding through a source matched to its underlying assets.
“IFC aims to support financial institutions that offer innovative products and services that help small businesses grow,” said Paolo Martelli, IFC Director Financial Institutions, “Custom Capital will be able to expand its equipment rental portfolio while building the track record necessary to access the broader capital market for further sources of funding.”
The initial ZAR 240 million (approximately $22.5 million) notes were issued by the newly created listed vehicle Compass Securitisation (RF) Limited to IFC, with additional issuances to future investors targeted to reach R1 billion.
Mercantile Bank and IFC, with RMB as lead arranger and Werksmans as legal advisors, have structured an innovative "private securitization" that contains elements of a best-practice securitization structure. The first unrated notes have been issued to IFC. This provides cost-effective funding to Custom Capital and prepares it for future public issuance by establishing a track record notes require to receive a public credit rating.
Karl Kumbier, CEO of Mercantile Bank, said, “The deal with IFC is fantastic and provides immediate access to ZAR 240 million of term funding that assists us in setting up a formal securitization structure. This deal will allow us to grow our rental finance business significantly and in turn assist more SME businesses to fund the assets they require in order to grow their businesses. Rental finance makes lots of sense for these companies as this funding method improves cash flows, provides a good return on assets and reduces the risk of owning obsolete assets.”
When Mercantile Bank acquired Custom Capital it had R30m of rental finance assets on its balance sheet. Under Mercantile, it has grown from ZAR 30 million to ZAR 430 million in less than three years resulting in a need for an innovative, self-sustaining funding mechanism to satisfy future funding requirements.
IFC is committed to developing capital markets in Africa. They allow private sector companies, including SMEs, to raise long-term funding and hedge risks. Through its investments IFC helps clients access capital markets to mobilize funding, while helping to provide asset diversification to institutional investors. Through IFC’s capital market program, it invests in financial infrastructure; provides guarantees or anchor investments for first-time issuances; and helps to structure innovative solutions for its clients. IFC also issues its own local-currency bonds in a growing number of domestic bond markets across Africa to facilitate capital market development.