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Amendment of the Rules and Regulati

Amendment of the Rules and Regulations of Acquisition Financing
In its meeting on 2 March 2016, the board of directors of the Central Bank of Egypt (“CBE”) issued resolution number 501/2016 amending resolution number 105/2009 concerning the rules and regulations of acquisition financing.[1] The importance of this resolution stems from the increasing interest in executing acquisition transactions of Egyptian companies. The importance of such transactions shall also increase in the forthcoming period, as a result of the gradual stabilization of the exchange rate market, together with the devaluation of Egyptian Pound, which would encourage foreign investment inflows.
Background
Article 6 of the Central Bank Law No. 88 of 2003 provides that the CBE shall take all necessary measures to ensure achieving its objectives and fulfilling its authorities, especially through influencing the banking credit in a way warranting the fulfillment of the actual needs of the different aspects of economic activity. To this end, the CBE may take any actions or measures required for enforcing the monetary, credit, and banking policies, as well as for guaranteeing the soundness of bank credit. It is in light of this provision that the CBE has issued resolution number 105/2009 in its board meeting dated 6 January 2009 setting out the rules and regulations for bank financing of acquisitions. The CBE then adopted resolution number 501/2016 on March 2, 2016 to amend the resolution of 2009.
Amendments
  1. Increasing the risk weighted assets ration

The CBE decided to increase the risk weighted assets ratio to become 200% compared to 150% for acquisitions by strategic investors where the acquirer operates in the same line of business as the target company or is vertically integrated with it. The CBE has also increased the ratio from 200% to 400% for acquisitions by investment funds or companies, private equities or venture capital companies.

  1. Lowering the finance limits for acquisition financing

The CBE has further lowered the finance limits for acquisition financing by setting out that the aggregate amount of acquisition financing shall not exceed 2.5% of the bank’s loan portfolio at the time of credit disbursement compared to the limit of 5% as set out by resolution number 105/2009. Acquisition financing may further not exceed 0.5% of the bank’s loan portfolio per client together with its related parties compared to 20% under resolution number 105/2009.

The 2016 resolution has also added a provision to resolution 105/2009 that requires that the aggregate amount of financing extended by banks operating in Egypt for purposes of financing one acquisition shall not exceed 50% of the value of the acquisition transaction, excluding letters of guarantee in cases of acquisition of companies listed on the Egyptian Stock Exchange. However, banks that work in joint financing shall be entitled to apply to the CBE for approval on increasing this limit. In case of approval, banks must notify the CBE monthly on the transactions for which the financing limit has been increased. Finally, banks that have financed acquisitions before the entry into force of this resolution shall comply with its provision within 6 months from the date of entry into force.
Conclusion
The amendments introduced by the CBE to the regulations governing acquisition finance is among the important amendments that will strongly affect the corporate financing in the Egyptian market and especially acquisition financing. This resolution shows that the CBE seeks to set new rules in the field of financing acquisition, to limit financing such transactions, and to encourage foreign financing of acquisition transactions instead of depending on local sources for financing of such transitions.   [1] CBE Board of Directors' Decision No. 501/2016 adopted on 2 March 2016 on the Rules and Regulations of Acquisition Finance.
In its meeting on 2 March 2016, the board of directors of the Central Bank of Egypt (“CBE”) issued resolution number 501/2016 amending resolution number 105/2009 concerning the rules and regulations of acquisition financing.[1] The importance of this resolution stems from the increasing interest in executing acquisition transactions of Egyptian companies. The importance of such transactions shall also increase in the forthcoming period, as a result of the gradual stabilization of the exchange rate market, together with the devaluation of Egyptian Pound, which would encourage foreign investment inflows.
Background
Article 6 of the Central Bank Law No. 88 of 2003 provides that the CBE shall take all necessary measures to ensure achieving its objectives and fulfilling its authorities, especially through influencing the banking credit in a way warranting the fulfillment of the actual needs of the different aspects of economic activity. To this end, the CBE may take any actions or measures required for enforcing the monetary, credit, and banking policies, as well as for guaranteeing the soundness of bank credit. It is in light of this provision that the CBE has issued resolution number 105/2009 in its board meeting dated 6 January 2009 setting out the rules and regulations for bank financing of acquisitions. The CBE then adopted resolution number 501/2016 on March 2, 2016 to amend the resolution of 2009.
Amendments
  1. Increasing the risk weighted assets ration

The CBE decided to increase the risk weighted assets ratio to become 200% compared to 150% for acquisitions by strategic investors where the acquirer operates in the same line of business as the target company or is vertically integrated with it. The CBE has also increased the ratio from 200% to 400% for acquisitions by investment funds or companies, private equities or venture capital companies.

  1. Lowering the finance limits for acquisition financing

The CBE has further lowered the finance limits for acquisition financing by setting out that the aggregate amount of acquisition financing shall not exceed 2.5% of the bank’s loan portfolio at the time of credit disbursement compared to the limit of 5% as set out by resolution number 105/2009. Acquisition financing may further not exceed 0.5% of the bank’s loan portfolio per client together with its related parties compared to 20% under resolution number 105/2009.

The 2016 resolution has also added a provision to resolution 105/2009 that requires that the aggregate amount of financing extended by banks operating in Egypt for purposes of financing one acquisition shall not exceed 50% of the value of the acquisition transaction, excluding letters of guarantee in cases of acquisition of companies listed on the Egyptian Stock Exchange. However, banks that work in joint financing shall be entitled to apply to the CBE for approval on increasing this limit. In case of approval, banks must notify the CBE monthly on the transactions for which the financing limit has been increased. Finally, banks that have financed acquisitions before the entry into force of this resolution shall comply with its provision within 6 months from the date of entry into force.
Conclusion
The amendments introduced by the CBE to the regulations governing acquisition finance is among the important amendments that will strongly affect the corporate financing in the Egyptian market and especially acquisition financing. This resolution shows that the CBE seeks to set new rules in the field of financing acquisition, to limit financing such transactions, and to encourage foreign financing of acquisition transactions instead of depending on local sources for financing of such transitions.   [1] CBE Board of Directors' Decision No. 501/2016 adopted on 2 March 2016 on the Rules and Regulations of Acquisition Finance.