After almost three years in the making, a recently ratified partnership between World Bank member the International Finance Corporation (IFC) and niche business bank Mercantile Bank has resulted in the establishment of a rental asset finance facility for South Africa-based small and medium-sized enterprises (SMEs), enabling these often cash-flow-challenged businesses to rent capital equipment rather than buy these largely high-cost assets.

Speaking at a media briefing this month, Mercantile Bank CEO Karl Kumbier said the deal would enable the entrepreneur-focused bank to grow its rental-finance business while assisting SMEs to fund the assets they required to grow their businesses.

“Rental finance makes a lot 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.

“The deal with the IFC is fantastic and provides immediate access to R240-million in term funding and assists us in setting up a formal securitisation structure,” he commented.

The facility would take the form of a securit- isation programme, with rental contracts originating from Custom Capital, a rental finance company majority-owned by Mercantile Bank.

“When we acquired Custom Capital, it had R30-million in rental finance assets on its balance sheet. We have managed to grow the book from R30-million to R430-million in less than three years, resulting in us [having] to come up with an innovative self-sustaining funding mechanism to satisfy our future funding requirements,” said Kumbier.

Following the finance agreement, Custom Capital would be able to expand its equipment rental portfolio while building the record necessary to access the broader capital market for further sources of funding.

While the asset rental company had, until now, relied on its parent company to provide funding for growth, the securitisation programme would assist it in accessing South African capital markets and long-term cost-effective funding through a source matched to its underlying assets.

The initial R240-million notes were issued by newly created listed vehicle Compass Securitisation to the IFC, with additional issuances to future investors targeted to reach R1-billion.

Mercantile Bank and the IFC, with Rand Merchant Bank as lead arranger and Werksmans Attorneys as legal adviser, structured an innovative ‘private securitisation’, which contained elements of a best-practice securitisation structure.

The first unrated notes were issued to the IFC, providing cost-effective funding to Custom Capital and preparing it for future public issuance by establishing a record of notes required to receive a public credit rating.

IFC financial institutions director Paolo Martelli said the corporation aimed to support financial institutions in their efforts to offer “innovative products and services” that helped small businesses grow.

“Through this investment, we aim to [leverage] South Africa’s relatively sophisticated financial market and increase access to finance for SMEs, as we believe a deep, liquid capital market is required to grow the domestic economy.