Securitization refers to a financing structure whereby an entity raises capital by pooling assets, loans, or receivables and converting them into tradable securities, obligations, or instruments. The payments to investors are principally dependent upon the cash flows generated by the underlying pool of assets. The assets may be originated by the entity itself or by a third party that derives economic benefit from the financing. Securitization is commonly employed to enhance liquidity, diversify funding sources, and transfer risk.

An Asset-Backed Security (ABS) is a financial instrument that is created through the process of securitization. It represents an ownership interest in a pool of underlying assets, loans, or receivables that generate cash flows. The securitization process involves transferring these assets to a special purpose vehicle (SPV) or trust, which in turn issues securities to investors. The repayment of principal and interest on the ABS is primarily dependent upon the performance and cash flows of the underlying asset pool. ABS structures are utilized to facilitate liquidity, risk transfer, and funding diversification for the originating or benefiting entity. Asset Backed Securities are regulated by the Capital Markets Authority and are governed primarily by the Capital Market Authority Policy Guidance Note On Issue of Asset Backed Securities (2017) and the Capital Markets Act (Cap 485a).

An Infrastructure Asset-Backed Security (IABS) is a type of asset-backed security issued through the securitization of cash flows associated with infrastructure-related assets or obligations. The repayment obligations under an IABS may derive not directly from the revenues generated by the infrastructure asset itself, but from alternative pools of assets, including receivables or contractual payment streams issued by the benefiting entity. This structure allows for the financing of infrastructure projects while providing flexibility in the sources of cash flow available for servicing the security. The IABS framework facilitates the mobilization of capital for infrastructure development without necessarily creating direct dependency on the operational performance of the underlying infrastructure asset.

Receivables refer to payment obligations owed to an entity under contractual arrangements, typically arising from the sale of goods, the provision of services, or the extension of credit. They represent a legal right to receive cash or other financial assets from a counterparty at a specified future date. In the context of securitization, receivables are commonly transferred to a special purpose vehicle (SPV) or similar entity and serve as the underlying assets supporting the issuance of asset-backed securities. The cash flows generated by the collection of receivables are utilized to service the repayment obligations associated with such securities.

The Receivables for this transaction are Sports, Arts and Social Development Fund (SASDF or The “Fund”) future revenues, specifically they are cash flows expected to be collected by the fund from levies on Betting, Gaming and Lottery activities in Kenya as guided by Section 4(1) of the Public Finance Management (Sports, Arts and Social Development Fund) Regulations, 2018.The Fund collects these cash flows and assigns them to the Issuer (Linzi FinCo 003 Trust) on a “first charge” basis contingent on the Issuer financing the Project (Talanta Sports City Stadium Construction). The Issuer is expected to utilize these future cash flows to service its repayment obligations to Noteholders of the Linzi 003 Infrastructure ABS.

The Securitization Team, led by the Securitization Arrangers, concluded that, in structuring the Infrastructure Asset-Backed Security (Infrastructure ABS), the projected future cash flows from the underlying infrastructure asset were likely to be too volatile and operationally complex to manage effectively. Consequently, the team determined that securitizing the future receivables of the Fund, rather than relying directly on the asset’s cash flows, would provide a more stable and administratively feasible basis for the transaction.

SASDF is expected to collect approximately KSh. 15 billion in the financial year ending 2024. The Project’s EPC costs are estimated at approximately KSh. 45 billion. Consequently, SASDF recognized the existence of a cash flow deficit and determined that, in order to meet its EPC payment obligations, it would need to secure a favorable deferred payment arrangement. Rather than relying solely on a deferred payment arrangement with the EPC Contractor, which would have limited its control over financing terms and likely resulted in higher costs, SASDF opted to procure the Securitization Arrangers to structure an IABS. The IABS structure provided the SASDF with a financing solution tailored to its requirements.

In the event that the Fund incurs a cash flow deficit, the ultimate financial responsibility lies with the National Government. Pursuant to Section 24(9)(a) of the Public Finance Management Act (PFMA) of Kenya, the Cabinet Secretary is authorized, with the approval of the National Assembly, to allocate funds from the National Exchequer Account to cover any deficit in the Fund. Alternatively, the National Government may opt to wind down the Fund, during which process any remaining balances would be transferred to the National Exchequer Account, and outstanding liabilities settled accordingly.

Pursuant to Section 24(9)(b) of the Public Finance Management Act (PFMA) of Kenya, upon the winding up of the Fund, any deficit remaining within the Fund shall be settled from the National Exchequer Account. As the Issuance constitutes a future cash flow obligation of the Fund, the aggregate of the outstanding principal and accrued interest amounts, which would otherwise have been payable over time, shall become immediately due and payable by the National Exchequer Account upon the winding up of the Fund.

The Notes will be supported by three major credit enhancements:

• An Escrow Account established by the Fund in favor for the Issuer that shall cover 3 months of Receivables.
• A Standby Letter of Credit established by the Fund with its fiscal agent in favor the Issuer that shall cover an additional 3 months of Receivables.
• An Assignment Rights Agreement between the Issuer and the Originator(SASDF) that establishes that the Receivables are guaranteed by the Fund.
  
   

The Notes will indeed receive a Long Term National Scale Issuer Credit Rating by the Global Credit Rating (GCR) Agency.

Pursuant to Paragraph 51 of the First Part of the First Schedule to the Income Tax Act (Cap. 470) of Kenya, Noteholders shall be exempt from withholding tax on interest income earned from their investment in the Notes.