Promise could be fulfilled
To-date, the Middle East has been a backwater for securitisation with only a handful of deals. But that is set to change with a clutch of transactions in the market and more on the way. Paul Farrow reports.
The Middle East is often cited as a potential growth region for securitisation, but so far the number of deals has remained frustratingly small. There are certainly some obvious drivers to suggest such potential. There is the inflow of expatriates needing suitable housing; pro-active government policies, and a high projected level of GDP growth.
But up to the end of Q1 2007, there had been just a handful of deals, such as the US$925m Blue City financing from Oman that was led by Bear Stearns and launched in 2006; a TD50m (US$38.7m) RMBS deal from Tunisia; and a US$23m MBS transaction by the Kingdom Instalment Company from Saudi Arabia.
"There are several factors that complicate the emergence of securitisation in any new market," said Zeynep Adalan, head of emerging market securitisation at Standard & Poor's. "Securitisation is usually difficult for the issuer first time; the ratings process is complex; and often securitisation does not feature in local legislation. There is certainly potential in the Middle East in terms of growing consumer wealth and power, but it takes time to resolve some of these issues."
Iad Georges Boustany, general manager of Beirut-based investment bank BSEC, points out that different factors have held back securitisation across the region.
"In the Levant – from Turkey down to Israel – the legal frameworks are fairly supportive according to the rating agencies, but aside from Israel, the sovereign ratings are poor," he says. "In the GCC region, by contrast, the sovereign ratings are generally high, but the legal frameworks are poor from a structured finance perspective.
"The legal frameworks haven't really changed, except to some extent in Dubai, but legal counsels and rating agencies are now more comfortable with them and therefore have fewer qualifications when it comes to a securitisation," he said.
Boustany points to Fitch's challenge factor, published six months ago, as an important development in this context. This provides a measure of the legal and regulatory environment in a country, and determines the number of notches that a securitisation can achieve above the rating of the issuer.
Earlier this year, Moody's forecast a big increase in securitisation issuance from the Middle East and North Africa (MENA) region. Khalid Howladar, vice-president in Middle Eastern and Islamic structured finance at the ratings agency, argued that the rapid growth in the region's underlying markets would require – and even favour – securitisation as an efficient financing method.
In the ABS arena, for example, Howladar said that changing government attitudes and regulations to control consumer lending could well encourage securitisation from Kuwait. The government there has a history of bailing out reckless consumer borrowers but is now trying to tackle the problem at the supply end by tying consumer lending to balance sheet growth.
"One reaction to this is for banks to grow their deposits, but this has led to tremendous, cut-throat competition and cannibalisation of margins. The other is to use securitisation to move some of the existing consumer loans off-balance sheet," Howladar said.
Alex Batchvarov, head of international structured credit research at Merrill Lynch, notes that there is already a range of available potential collateral, such as auto loans, consumer loans, and general unsecured loans.
"There is a lack of detailed, historic data, but then that is also the case in Eastern Europe. The lack of data is not unique to the Middle East, and is not insurmountable. The issue is whether investors are prepared to accept the perceived risk, and that is purely a question of judgement," said Batchvarov.
In the medium term, he thinks that regional banks' access to liquidity is not a bar to a developing securitisation market. "As economies become more open, deposits normally flow into other products, and there is no reason why this will not also be the case in the Middle East," he said.
But the short term, banks may not be the main source of issuance. "They have consumer loans, and to a lesser extent credit card balances, but I expect that, unlike the situation in many other countries, due to the easy access to liquidity for many Middle East banks, the region's securitisation market will get going with MBS product," said S&P's Adalan.
BSEC's Boustany agreed that CMBS was likely to provide most of the volume in the short term. "The size of the commercial mortgage market is phenomenal," he said.
And Moody's Howladar noted that the high level of investment in real estate in the Gulf region and new laws on property ownership for non-GCC nationals were both likely drivers to boost the prospects for CMBS issuance.
This summer a clutch of securitisation deals were in the market, including a CMBS deal through HSBC and a residential mortgage-backed deal through Morgan Stanley and Standard Chartered Bank, with a Saudi car rental deal and a debut issue from Qatar Islamic Bank on the way.
HSBC is lead manager for the US$67m UAE CMBS Vehicle No 1. The transaction is a securitisation of a single loan secured by a mortgage on an office property located in the country's Technology and Media (TECOM) Free Zone. Rated by Moody’s and Fitch, the five-year deal comprises US$28.1m Double A minus rated Class A notes, US$12.9m in split-rated A3/A Class Bs, US$12.5m in Baa1/BBB Class Cs and US$13.5m in Class Ds rated Baa3 by Moody’s only. The Double A minus tranche priced at plus 50bp, the Single As at plus 70bp and the Triple Bs at plus 140bp.(See the separate profile in this report.)
In the RMBS arena, Morgan Stanley and Standard Chartered Bank are bringing Tamweel Residential ABS, a US$220m securitisation of leases on Dubai residential properties. The portfolio consists of 829 leases with a weighted average current foreclosure value of 45.9% and 16.2-month seasoning, according to analysts at RBS. The transaction has been vetted by Tamweel PJSC's Sharia advisory board.
Rated by Moody's and Fitch, the capital structure comprises US$185.9m in 2.8-year Double A rated Class A notes (the highest outstanding ratings assigned to a portfolio originated by a UAE-based institution), US$16.1m in 5.1-year split-rated Baa3/BBB+ Class Bs, US$10.3m in 5.1-year Double B minus Class Cs and US$7.7m in 7.8-year unrated Class Ds. Emirates National Securitisation Corp arranged the deal. The Double As priced at plus 35bp, the Ba3/BBB+ tranche at plus 120bp, and the Double Bs priced at plus 395bp. (See the separate profile in this report.)
The Tamweel deal is part of a US$1.1bn financing package that also includes US$300m of convertible sukuk bonds and US$500m of sukuk bonds. There will have to be a change in company statutes to allow foreigners to own the shares and so be able to buy the converts.
Important progress has been made in Dubai to facilitate an RMBS market, and bankers note that the regulator in that jurisdiction seems fully aware of what needs to be done to bring the market into life.
The fact that foreigners have recently been allowed to buy property in the Emirate both regularises and facilitates mortgage lending. It is now possible for expatriates to purchase property in certain developments within Dubai either on a 99-year lease or a freehold basis, and such mortgages can be an important element in RMBS deals. After the Tamweel transaction, Amlak, another Dubai mortgage finance company, is understood to be a likely RMBS issuer.
Further out, Qatar Islamic Bank (QIB) is planning what it claims to be the first securitisation by a bank in the Middle East. It has hired Kuwait-based Islamic investment bank Rasameel Structured Finance Company and an undisclosed international investment bank as advisers. Through the securitisation, QIB aims to raise funding for the bank's real-estate financing and investment activities locally and abroad.
QIB's CEO, Salah Mohamed as-Jaidah, said in a statement that the proposed securitisation was part of the bank's five-year plan to diversify its Islamic financing tools and to enhance QIB's banking expertise with the recent recruitment of a senior sukuk securitisation structurer. This would, in return, allow QIB to provide the necessary financing for medium and macro projects in the country.
In addition, a Dubai-based government-related entity was rumoured to be launching a securitisation as early as June through lead arrangers Barclays Capital, Dubai Islamic Bank, Lehman Brothers and Standard Chartered. Overall, S&P's Adalan forecasts up to US$10bn of securitised issuance from the region in the next 12 months.
Given the cultural nature of the region, it would be natural to expect securitisation to take an Islamic-compliant path, but according to BSEC's Boustany several problems have limited the growth of Sharia-compliant securitisation in the Middle East to date.
"There is the question of whether receivables can be securitised? One problem here is that although receivables are an asset on the balance sheet, they are viewed from the obligor's standpoint, and translated into Arabic as 'debt'," he said. "There is also a scarcity of assets eligible for securitisation under Sharia-compliant transactions, and the need for the structure to be shown to be Sharia-compliant. In addition, banks in the GCC region are liquid, which reduces the need for funding, and the legal framework is still challenging."
Another factor is that certain assets that regularly form the basis of securitisations in other markets, such as credit cards, are not suitable for Sharia-compliant deals. However, Boustany suggests a variety of assets that could be securitised, such as rental flows, commercial and retail mortgages, operating revenues, oil and gas-related flows.
BSEC is bringing an ABS deal backed by rental cars for Hanco Renta Car, a Saudi car rental company. The issue, which is expected to be priced before this autumn, is designed as a Sharia-compliant structure. BSEC organised a US$30m privately placed deal for the company in February 2004, and the new deal is likely to be up to twice that size.
"The likely buyers for this paper are regional players that know the company and the obligors, but that includes the regional offices of international banks," said Boustany, who believes that this will be the first true sale, rated deal from Saudi Arabia.
The development of acceptable Sharia-compliant structures will certainly be important if the Middle East's potentially most exciting market is to be opened up.
Moody's Howladar sees Saudi Arabia as perhaps having the greatest long-term potential for securitisation in the region because of its relative economic size and population, and because housing finance is an active social issue.
According to S&P's Adalan, Sharia-compliant deals would appeal to local investors, and BSEC's Boustany agrees. "Most Saudi deals will be Sharia-compliant, and that does not pose significant structuring problems," he said.
Merrill's Batchvarov agreed. "The foundation of Sharia compliance is asset-based securitisation, so there is no fundamental problem with such deals. The real issues in this market are like any other – establishing legal title and determining the correct benchmark for pricing."