DEWA aims for the future
DEWA has undertaken the largest true sale securitisation in the MENA region. By Debashis Dey, partner and head of capital markets Middle East, and Daniel Holder, senior associate, Clifford Chance LLP.
In July 2007, the Dubai Electricity and Water Authority (DEWA), the major utility provider in the Emirate of Dubai and wholly owned by the Government of Dubai, funded itself for the first time in the commercial paper market, raising US$1bn in finance, backed by a sale of receivables arising from customer accounts held by DEWA in Dubai.
The transaction was unique in many ways and notable highlights were:
* The funding occurred in the summer when the credit crisis first began, with extreme pressure on asset-backed funding generally, though DEWA's transaction was successfully funded despite market conditions
* The transaction, at that time, was the largest true sale securitisation of its kind in MENA history, and the first attempt to securitise consumer and commercial utility receivables
* The funding was the first asset-backed finance provided by each of Calyon's and ABN AMRO's respective conduits in the MENA region
* The funding structure allowed for further sales of receivables to a funding SPV formed by DEWA with drawdowns from the original conduit providers (Calyon and ABN AMRO) and the flexibility to add other funders in future as DEWA wished – DEWA used this flexibility by making further sales to raise an additional US$1bn in funding in May 2008
This article will discuss the transaction in detail and highlight a few of the key features that underpin the securitisation structure. Given the significance of the funding platform and its success, the structure could be replicated in future for other utilities, consumer lenders or other types of originators that generate receivables of a similar monthly duration.
DEWA's diversified funding strategy
In hindsight, the approach made by DEWA in utilising the commercial paper platform as part of its diversified funding strategy appears to be highly prescient of the need to diversify the various sources of financing that a company that has significant infrastructure investment obligations would need in challenging market conditions.
Certainly, at the time the asset-backed structure was first put forward to DEWA by Emirates National Securitization Corporation (ENSEC, an asset-backed structuring adviser to various Dubai Government owned entities), the transaction was considered novel and perhaps too far ahead of its time. However, given today's market conditions and the difficulty that other companies are having in seeking funding at reasonable costs (or any funding at all), the structure has proven to be a resilient platform.
At the time of writing, DEWA had funding lines from conventional commercial paper asset-backed funding, Sharia-compliant funding from various regional banks, and one significant sukuk issue from earlier this year. This highly diversified platform has allowed DEWA to raise long-term and short-term funding to match its internal working capital and investment needs, which have very different maturity profiles. Accordingly, despite pressure on costs of funding across various products, DEWA has managed quite well to spread its financing across different products with the ability to source better pricing as and when it can.
Background of funding needs
DEWA is a wholly owned government entity, formed as a decree company, to supply water, water treatment and electricity services in the Emirate of Dubai under Decree No 1 of 1992, as amended by the Decree No. 13 of 1999. DEWA has significant infrastructure spending requirements given the rapid pace of development in the Emirate across commercial and residential sectors and the boom in property development in the region.
As the sole authorised utility provider in Dubai, DEWA has significant revenues from various consumer and commercial accounts. However, the payment cycle on these accounts is monthly while DEWA's spending needs are often large, staged payments across major infrastructure projects.
The commercial paper funding structure presented a unique opportunity to match the monthly cycle of commercial paper funding to the payment of consumer and commercial receivables received by DEWA, and raise a significant amount of funding from the sale of future rights.
The true sale
Under the securitisation, DEWA selects certain eligible accounts to be flagged as securitised accounts and then sells the rights to a number of years of collections of receivables on each of these accounts, in return for an upfront payment of the purchase price.
The sale was made to a newly incorporated Cayman Islands SPV, Thor Asset Purchase Company Ltd, established as an orphan SPV with nominal capitalisation held by a nominee for charitable purposes. The choice of Cayman Islands was made due to the ease of obtaining regulatory consents to establish a vehicle and the lack of any tax issues for funds flowing from Dubai and then through to the European conduits.
The sale was documented under a receivables purchase agreement (RPA) that needed to provide for monthly sales of receivables going forward as well as sales of receivables on day one. The RPA was governed by the laws of the UAE, which was unique for a transaction of this size and complexity. The need to apply local law arose from the fact that the seller (DEWA) is resident in and originating receivables in Dubai under the laws of the UAE.
Significant time was spent with transaction parties and the rating agencies on the legal analysis of whether the sale did comply with local law and would survive any bankruptcy of DEWA. Given the inability to sell future receivables under the UAE Law (receivables that have not yet come into existence), the legal analysis was that DEWA had in effect sold the rights to all receivables arising from certain flagged accounts but only those that actually existed at the time of any insolvency of DEWA could be said to be sold property.
In effect, Thor was paying an upfront purchase price for the right of whatever receivables were in existence at the time of sale (such amount being less than US$1bn) plus the right to the further receivables that arose in future, up to an aggregate limit of US$1bn.
The offshore SPV
Using Thor as an intermediary SPV followed a common structure for commercial paper funding structures. The intermediary vehicle allows for a sale structure that leaves the direct sale at the local level, one level removed from the international banks providing the funding through their conduits. In addition, the use of the SPV outside of the UAE allows for English law security to be put in place (necessary for rating and credit purposes) as well the flexibility to design English law documentation that could be enhanced to allow for terms that might not be enforceable under UAE Law.
In order to raise its funding to pay for the initial purchase of the receivables, as well as the ongoing purchase each month (as the commercial paper was "rolled over" for the next period), Thor issued funding notes to each of the relevant conduits in the structure (thus the conduits were purchasing funding notes as their assets, such notes being ultimately backed by DEWA originated receivables).
The funding documentation
The funding agreement entered into between the conduits and Thor was unique in that it was designed to allow a multitude of funding entities to fund future transactions. Accordingly, Thor could issue notes to conduits or to conventional lending banks directly, and in turn these banks could syndicate their purchase to other funding entities. This flexibility meant that as the programme progressed and the overall amount of receivables purchased increased, conduits and/or banks could sell, trade or syndicate their exposures in order to manage their internal cost of capital and risk profile.
The first series of issued notes were revolving in nature, matching both the terms of commercial paper (which revolve on a 30-day cycle) as well as the collection of receivables on each of the flagged accounts (which is paid at some point during each 30-day monthly period). The economics of the funding dictated that the notes issued by Thor were revolving in that they paid interest each month but principal was rolled over such that it remained outstanding each month. At a predetermined date, this revolving period will end and the notes will begin to amortise, paying down principal outstanding as well as interest due each month.
The cost of funding of the commercial paper markets is passed on to Thor each month, with the note interest being reset to match such cost of funding plus a margin. The analysis of the cashflows of the transaction demonstrated that the receivables generated more than enough performing collections from customers to service this cost of funding plus future amortisation of principal.
As is typical for any rated commercial paper structure, a liquidity line and credit facility is extended to each commercial paper conduit to deal with periods when commercial paper buyers are unwilling to roll over their paper and sufficient new buyers are not available to provide further funding to the conduits and Thor. In such cases the liquidity line can be drawn to make up for the missing funding and passed through the conduit to Thor.
Thor is an SPV and thus lacks the management or employees to properly service the assets it has purchased. Accordingly, DEWA entered into a servicing agreement, simultaneously with entering into the RPA, whereby DEWA agreed to maintain the servicing of, and collection on, the relevant flagged customer accounts. In this way, the customer relationship remains between DEWA and its customers while allowing for the sale of assets to Thor.
At the time of the first issue of notes by Thor, DEWA was not a rated entity. Given the rating agencies' usual concerns about the credit strength of an unrated entity that is providing servicing (which is critical to ensure the repayment of the notes), the rating agencies required some form of performance guarantee by a credit that was of higher financial strength than DEWA. This is supplied under a performance guarantee provided by the Government of Dubai to back certain of DEWA's obligations.
At the time of writing, the international credit markets are going through the most turbulent period of events in the last 60 years. While the headlines have contained many negative statements about the effect of certain securitisation products and the risks that they have created for investors, it is worthwhile noting that securitisation can also play a very useful role in diversifying the funding platform of a stable entity such as DEWA.
The assets underpinning DEWA's securitisation are far and away of better quality than the toxic assets that have led to so much difficulty in the US. In addition, the core business of DEWA is resilient in that its business lies at the very heart of Dubai's economic engine.
For these reasons and those expressed above, DEWA's funding platform remains one that continues to interest international investors and institutions and lends itself well to a commercial paper asset-backed structure.