hat tip-Michael S.

Raising the roof
by Daniel Stanton on Sunday, 10 February 2008

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Adel Al-Shirawi, CEO, Tamweel.
Think of mortgage securitisation and you probably think of Citigroup’s Chuck Prince clearing his desk after a US$23.2 bn misjudgement.

It would be a shame if the US sub-prime meltdown, which occurred due to a failure to judge risk accurately, rather than a problem with the financial techniques involved, deters Middle East finance houses from opening up to securitisation, a process that could allow them to release funds for more effective investment.

In Saudi Arabia, even up to today there is no mortgage law.
The mortgage market is booming in the Gulf – high demand from a growing population, and the development of laws to make it easier for expatriates to buy property are combining to create a golden opportunity for home finance providers.

Despite the favourable market conditions for mortgage providers, some are realising that they could do even better by managing their capital more effectively. Securitisation, in which finance providers free up capital by selling the rights to future earnings, can allow institutions to raise funds for expansion now, rather than in a few years’ time.

Unicorn Investment Bank (UIB) undertook the first mortgage-backed securitisation (MBS) in Saudi Arabia in July 2006 on behalf of Kingdom Installment Company (KIC) – a transaction that was also the first true-sale securitisation in the GCC. UIB acted as lead manager, Shariah advisor and joint bookrunner, with Standard Bank the other joint bookrunner.

The sukuk transaction was backed by US$23m of ijara and istisna contracts, with banks making up the majority of the investor base. The sukuk was priced at a fixed rate of 6.55%, maturing in 2020, although KIC is committed to repurchase the assets at month 36, backed by a guarantee from Dar Al Arkan.

In addition, the International Finance Corporation (IFC), the private sector financing arm of the World Bank, provided a mezzanine credit enhancement in the form of a standby murabaha facility.

Ikbal Daredia, managing director, head of capital markets and institutional banking, UIB, says there were challenges involved with the transaction.

“In Saudi Arabia, even up to today there is no mortgage law,” says Daredia. “They are developing it and they have licensed mortgage providers, but the mortgage law in itself is not there yet.”

This can create difficulties should a mortgagee default on their payments, since Saudi courts are often reluctant to evict tenants.

Daredia adds: “The other issue that one may face, especially in Saudi Arabia, is that these mortgages are for long term periods, like 25 to 30 years, and with the lack of a proper swap market, the tendency is to do a fixed rate MBS rather than a floating rate MBS.

“Given the interest rates where they are, we are probably at the bottom of the interest rate cycle, so institutions which are lending against these may find that it could be a loss making transaction.

The relatively recent development of the mortgage market in the Gulf also means that there are fewer mortgages to use as underlying assets for a securitisation.

“To do an MBS you need the volume as well,” points out Daredia. “If you look at the UAE market, the market has picked up in the last few years quite well in terms of mortgages etc, but still you don’t have the mass volume like you have in the West. That in itself slightly restricts the volume that you can do on MBSs.

Tamweel, an Islamic mortgage provider in the UAE, has market-leading positions in market share, net profits and return on equity. It has attempted to strengthen this position through the use of securitisation to enable further investment.

Adel Al-Shirawi, CEO of Tamweel, says that the way mortgage providers use their capital will decide which ones succeed.

“How good is their product know-how, do they create products that could be underwritten, securitised, structured, and could be sold off outside?” he asks. “Or they could structure silly products that cannot go beyond their balance sheet, that will be always capped to their internal balance sheet and they cannot take it off.

In line with this belief, Tamweel has completed two Shariah compliant securitisations so far, totalling $560m. “We did the first securitisation in 2005, but that was cash-collateralised,” says Al-Shirawi.

The second one we did recently was $210m, rated Aa2 by Moody’s, AA by Fitch, and 85% of the securitisation was senior debt.” In July last year, the Irish Stock Exchange listed Tamweel Residential ABS CL 1, based on residential properties in the UAE.

It securitised lease payments from Shariah compliant, long term real estate lease agreements.

This marked the first-ever issuance of various tranches of notes in an Islamic transaction and the first perfected sale structures in a securitisation transaction from the UAE.

Tamweel securitised its book of 736 ijara contracts worth $210m, with the issuance divided into notes of four classes with a legal maturity in 2037. Of these classes, A, B and C were rated Aa2 by Moody’s Investors Service and AA by Fitch Ratings Limited, while the unrated class was retained by originator.

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