Opting for more diversity in the financial instruments, the recent amendments of the CMR have introduced six new types of bonds.
Zeinab ShohdySenior Counsel,Banking & Finance
The executive regulations of the Capital Markets Law issued by the Ministerial Decree no. 135 of 1993 (the “CMR”) has recognized and regulated in 2018 the issuance of green bonds and financing instruments that proceeds of which are allocated to the financing and refinancing of environmental and eco-friendly projects. Opting for more diversity in the financial instruments, the recent amendments of the CMR issued by virtue of the Cabinet Decree no. 3456 of 2022 (the “CMR Amendments”) have introduced six new types of bonds that are designed to be issued by (i) Egyptian entities, corporate bodies and authorities; and (ii) international and regional entities and institutions in case the issuance targets projects in Egypt.
The CMR Amendments have been issued in anticipation of Egypt hosting the 27th conference of Parties to the United Nations Framework Convention on Climate Change. The new forms of bonds, which are aimed to finance sustainable development related projects and activities, are as follows:
Sustainable development bonds: which should be dedicated to the financing of sustainable development causes. The proceeds of said bonds should be allocated to finance green and social development projects that are aimed to achieve sustainability.
Sustainable development related bonds: the distinctive nature of this type of bonds as compared to sustainable development bonds is that the proceeds are not required to be directed primarily to specific sustainable development projects provided that the issuer has general sustainable development goals. In this case, the proceeds of the bonds are used to finance the operations of the issuer as long as the issuer do contribute to sustainable development causes.
Social Impact bonds: the proceeds of these bonds should be dedicated to the financing or refinancing of existing or new social projects.
Women empowerment bonds: this ultimately falls under the category of the social impact bonds. However, the proceeds of women empowerment bonds are designed to allow the issuer to finance or meet initiatives, policies or implement projects that support women empowerment cause and enhance gender equality in all fields.
The issuer should, yet, satisfy one or more of the following requirements in order to be able to issue this type of financial instrument:
women should be represented by at least 25% in the board of directors of the issuer; or
one or more woman/women own(s) at least 51% of the share capital of the issuer; or
female work force represent at least one third of the total work force of the issuer; or
its policies support gender equality within work environment; or
provides or develops at least one third of its products or services for the betterment of the life quality of women.
Climate bonds: the proceeds of these bonds should be directed to the financing or refinancing of environmental friendly projects that are aimed to reduce carbon emanations and minimize repercussions of climate change and global warming. As part of the specific requirements applicable for the issuance of climate change bonds, report of a certified independent environment advisor should confirm how the bonds issued would meet global climate standards.
Transitional environment bonds: which are designed to finance activities or industries (that are in nature polluting or non-environmental friendly) where the stakeholders wish to develop their activities and operations to reduce their harmful impact to the nature and become more environmental friendly. These bonds can be issued by entities that are not qualified to issue green bonds due to the nature of their activities such as industrial activities, aviation, shipping, oil and gas as well as chemical industries. Said bonds can also be issued in pertinence with, inter alia, sustainability projects relating to reduction of pollution and emanations that contribute to global warming and climate change.
The issuer of transitional environment bonds would be subject to an additional financing interest that might be incurred commensurate with the benefits realized from the bonds issuance in case the issuer fails to achieve the goals of the issuance.
Diversification of debt instruments encourages relevant entities to contribute to the sustainable development causes and initiatives of the Egyptian government.
The CMR Amendments have provided examples of sustainable development projects that can be financed by the proceeds of the bonds, including:
Women empowerment in all fields as well as gender equality;
Infrastructure with reduced costs;
Access to education, healthcare , professional training, financing, financial services and such other essential services;
Availing housing at reasonable cost;
Availing work opportunities and abating unemployment;
Nutrition security and nutritional sustainability systems;
Combating epidemics and pandemics; and
Enhancing sustainability of water resources and maritime environment and safeguarding of coastal areas, nautical tourism and deep-sea mining.
The issuer should (i) open a sub-account dedicated to the sole purpose of managing the proceeds of the issuance; and (ii) allocate an investment portfolio for the projects subject of the financing.
The issuer would be under a strict legal obligation to submit reports, on frequent basis, to the Financial Regulatory Authority evidencing that the proceeds of the bonds are indeed directed to the financing or refinancing of the relevant sustainability projects and that policies and procedures are being implemented to showcase the benefits and feasibility of the social and environmental goals. Such reports must be accompanied with an auditor’s report throughout the tenor of the bonds.
The aforementioned reporting obligation include:
annual reports throughout the tenor of the bonds and until maturity confirming the execution of the financing of the relevant projects;
annual reports showcasing the use of proceeds of the issuance and its allocation to the diverse sustainable development projects as applicable. The issuer must disclose any changes to the financed projects;
report on the comprehensive sustainable development strategy implemented by the issuer;
annual reports issued by the relevant independent experts and advisory institutions assessing the whether the financed projects are compatible with the international sustainability standards and criteria. With respect to the climate change bonds and bonds issued in pertinence with global warming matters, the issuer should procure a report from an external environmental auditor evidencing the extent of compliance of the issuer with the criteria of the environmental and climate related bonds.
The entity that intends to issue bonds under the auspices of the CMR Amendments should:
obtain the approval of the Financial Regulatory Authority;
elect an investment bank and bookrunner that is licensed as such by the Financial Regulatory Authority;
obtain a credit rating with a score evidential of the ability of the issuer to meet the payment obligations resulting from the bonds issuance;
procure an auditor’s report (or an independent institutional advisor in case of environment related bonds) confirming the compliance of the purpose of the issuance with the projects subject of the financing;
determine the price of and yield on the bonds.
The new types of bonds come as a major step to diversify the debt instruments as well as support the government’s vision and core initiative (known as ‘Decent Life’) in relation to sustainable development and women empowerment.
For further information,please contact Zeinab Shohdy.
Published in February 2023
