Transcript Securitisation Middle East Presentation

Simon Stockley – Kingdom Instalment Company
KSA MBS (I) A CASE STUDY
May 2007
KSA residential real estate is witnessing unprecedented
growth and home finance likewise is growing rapidly
 SR 19 Billion ($5 Billion) in estimated real estate
finance supplied in 2004
 65% of the market is serviced by commercial
banks, which offer the cheapest financing but
with restrictive eligibility criteria
 8% of the market is serviced by specialized
installment companies that on average charge
2% higher than banks
 With a 1.8% mortgage-GDP ration the KSA
market has large growth prospects:
 37% of the population lives in rental
properties representing a large current
demand for housing finance
 Only 10% of new residential properties are
currently financed through home loans.
Distribution of KSA Loans by Lenders
Installment
Companies
Government 8%
11%
Developers
16%
Commercial
Banks:
Conventional
47%
Commercial
Banks: Islamic
18%
Current Property Ownership (2004)
Apartment
Owned Villa Rented
7%
11%
Apartment
Rented
30%
Villa Owned
52%
Mortgage Finance as a Percentage of GDP (Developed Countries)
Percent (%)
Mortgage Finance to GDP (%)
80%
70%
60%
50%
40%
30%
20%
10%
0%
France
Germany
Spain
UK
Developed Countries
Italy
U.S.A
Mortgage Finance as a Percentage of GDP (Developed Countries)
Mortgage Finance to GDP (%)
Percent (%)
20%
15%
10%
5%
0%
Malaysia
Thailand
China
India
Developing Countries
Indonesia
GCC
Saudi Mortgage Finance Market
 Constraints:
o Lack of specialist mortgage finance firms.
o Lack of liquidity into the mortgage finance market.
o Lack of consumer education in mortgage finance
o Lack of commitment to the industry by majority of players.
o Lack of regulated legal system.
o Lack of developed swap market
KIC has been a pioneer in the KSA mortgage market by offering
the first 20 year home mortgage product
 KIC started operations in 2000 is the
largest specialized housing finance
company in KSA with a total market share
of 2.28%
 Steadily built a sizeable portfolio with a
strong performance track record
Housing Finance Recievables Outstanding (USD)
2004
378,130,960
2003
319,483,653
2002
166,602,199
 Mortgage book of over $450 million
and default rates of less than 0.5%
Operating Profit
 KIC is a market leader in product features
and client service
 Only housing finance company offering
pricing competitive to banks
USD MM
 Only specialized housing finance
company to offer 20-year mortgages
54,631,698
30,510,728
13,362,131
2002-2004
KIC applies conservative lending standards
and closely monitors arrears
Credit Criteria of the RRBS Pool:

Weighted Average LTV 78.99%

Weighted Average PTI 29.29%

Lending restricted to major cities

Legal ownership of asset with financier
until loan is paid off easing foreclosure

Centralized credit approval process
PTI
11,375,884
10,102,686
2,622,736
21,833
-
788,760
-
781,419
0.01 - 5.00 5.01 - 10.00 10.01 - 15.00 15.01 - 20.00 20.01 - 25.00 25.01 - 30.00 30.01 - 35.00 35.01 - 36.0
Arrears Management
> 27mths
1,126,781
>24mths
&
<=27mths
>21mths
&
<=24mths
Arrears have never exceeded 0.22%
of the portfolio and were 0.10% on
December 30, 2004
>18mths
&
<=21mths

2,218,080
992,364
110,096 428,889 485,429
>15mths
&
<=18mths
Only 1 case of foreclosure in 4 years
of operation, and successfully
executed
>12mths
&
<=15mths

4,117,149
2,653,295 2,921,050
>9mths &
<=12mths
Personal guarantors of client are
financially liable for client
>6mths &
<=9mths

8,564,758
>3mths &
<=6mths
55% of accounts paid by direct debit
and post-dated checks
<=3mths

Seasoning
KIC is a leading financier for its sister company
DAR AL-ARKAN (DAAR) one of the large developers of residential real estate in KSA
 DAAR is geared up to develop 65,000 residential units in KSA in the five years from 2005
through 2009
 DAAR has leading market share in residential real estate development in KSA, with
Kingdom-wide geographical expansion
 DAAR is the first residential real estate firm in the KSA to obtain the ISO 9001
certification for applying quality management systems that ensure products compliance
to international quality standards
 DAAR is a highly profitable and well capitalized business
2004 financial year performance
 Total assets SR 6 billion
 2004 financial year Gross Margin 48.76 percent
 ROE 33.92 percent
 Net profit SR 1.09 billion ($290 million)
 Leverage 0.11
Future Developments
 KIC currently being re-structured as Saudi Arabia Homeloans (SAHL) and
recapitalised at $550m making it largest specialised real estate finace provide in
the Middle East.
 Newshareholders in SAHL will include :
 Arab National Bank (40%)
 International Finance Corporation (5%)
 Daar Al Alarkan (15%)
 KIC (40%)
 SAHL will be licensed by both Ministry of Commerce (MOCI) and Saudi Arabian
Monetary Authority (SAMA).
 SAHL will shortly execute a second securitisation transaction ($400m) as part of
the KSA MBS series (KSA MBS II)
All KIC lending is Sharia compliant
 All major/structural maintenance responsibility of the Lessor
 All minor maintenance due to daily wear and tear responsibility of the Lessee
 Lessor responsible to obtain and maintain all required insurance policies
 All excess proceeds from total/partial loss occurrences for the benefit of the Lessor
 All excess proceeds from condemnation occurrences for the benefit of the Lessor
 Ownership of the asset must rest with the Lessor
 All late payment charges levied against the Lessee must only be for covering the
Lessor's administrative costs relating to recovering delinquent payments
 Prepayment penalties must be compensation for a specific loss to the Lessor and not
just levied for the purpose of penalizing the Lessee
 Rental Payment Amount must be for a pre-agreed amount only to be amended on
mutually accepted terms.
 Any taxes levied against the asset are the responsibility of the Lessor
Sharia Compliant Ijara or Istisna Lease Structure
2. Title and deed
Seller
1. Purchase price
3. Ijara finance
Lease or Istisna
Agreement
Financier
(Lessor)
4. (Mortgage) 5. Rental
payments
Buyer
(Lessee)
6. Final
payment
7. Title and
deed
UIB Sharia Board approved Tawarruq Facility structure to enable the International
Finance Corporation’s participation as guarantor
Issue Date:
Wakil services for providing
Tawarruq facilities
IFC
Issuer
Wakil fees [●%] paid
quarterly
Operation of each Tawarruq Facility:
Aluminum
100
Commodity
Broker B
IFC
Commodity
Broker A
Issuer
100
100
Legend
Red lines indicate movement of Aluminum and take place on the drawdown of each Tawarruq facility under the Program and
occur simultaneously.
Green lines indicate movement of monies and take place on the drawdown of each Tawarruq facility.
Black line indicates payment of the deferred purchase price of Aluminum by Issuer when sufficient funds become available
(subject to the Priority of Payments).
KSA MBS I International Sukuk Company Bond Structure
Appointment of Servicer
Custodian
Issuer KSA
Agent
Power of
Attorney
Delivery of
Title Deeds
Funds
on
Default
Instructions
Real Estate Rights
Transfer Agreement
SUKUK Certificates
ISSUER
Cayman SPV
KSA SPV
INVESTORS
Proceeds
SUKUK Proceeds
Servicing
True
Sale of
Assets
Proceeds
Contract
ORIGINATOR
Ijara
Agreements
OBLIGER
Purchase of property by the financing
company (originator) from the developer
Developer
Terms of Issue
Transaction
Residential Real Estate Backed Securities (RRBS)
Issuer
KSA MBS International Sukuk Company
Servicer/Originator
Kingdom Installment Company (KIC)
Standby Servicer
Dar Al-Arkan Real Estate Development Company (DAAR)
Collateral
First ranking residential loans on KSA properties which meet the eligibility criteria
Credit Enhancement
Excess Spread
from 22% over
collateralization
Credit Rating
A- by Capital Intelligence, Cyprus based international rating agency
Issue Size
$18.5MM backed by a housing finance lease pool of $23.5MM
Coupon
Fixed Rate (paid Quarterly) – 6.55%
Purchase
Undertaking
Originator purchase undertaking to repurchase notes and underlying contracts 36months from date of issue
Legal Maturity
2025
Listing
Bahrain Monetary Agency (BMA)
DAAR first loss guarantee to topup Excess Spread to 10% of
original balance
IFC second loss guarantee
for additional 10% of
remaining principal balance
Reputable International Administrators
Arrangers
Standard Bank and Unicorn Investment Bank
Trustee
Bank of New York
Cash Manager and
Account Bank
Bank of New York
Standby Servicer
Dar Al-Arkan Real Estate Development Company (DAAR)
Administration and
Accounting
Maples Finance Jersey
Lead Counsel
Lovells U.K.
Local Counsel
White & Case Saudi Arabia
Credit Enhancement
International Finance Corporation (Private Sector Lending Arm of the World Bank)
Distinguishing Features of Transaction
 Pilot project but now concept proved part of a series of ongoing issuance
programme
 Allows international investors access to exposure in KSA residential
market for the first time
 True securitisation :
 True sale
 Off balance sheet treatment
 No recourse to originator
 Solid legal opinions from reputable law firms
 Demonstrates ability to merge traditional Islamic structure with best of
practice in respect of Western securitisation technology
Lessons Learned
 Size does count
 Quality of data
 Systems and reporting ability
 Time, money, personnel
 Timing – market conditions
 Ratings – involve the agencies early
 Pricing
 “Build it and they will come”
The Way Forward
 In the “sweet spot”
 Fundamentals are right!
 Solid economic framework
 Strong investor demand
 Rating agencies and arrangers present in the market
 Reduced credit enhancement and over-collaterilisation
 Increased size and frequency of issuances (all asset classes) and
reduced spreads (c.f. SA capital markets)
SA Capital Markets Issuance Levels 2000 - 2006
40
20
34.64
18
36
32
16
28
23.81
22.04
12
24
10
20
8
16
6
12
9.80
9.97
7.92
7.53
4
2.36
2
1.88
0.44 -
4.25
1.25
8
4.37
4
-
-
0
1991
2000
2001
Total Issuances ZAR Billion
*
Courtesy of
2002
2003
2004
Securitised Bank Issuances ZAR billion
2005
2006
No. of Issuances
ZAR Billion
No. of Issuances
14
SA Capital Markets Spread Compression
2000 - 2006
Courtesy of
Thank you
Simon Stockley
 Mobile :+27 83 2760068
 Fax :
+27 866 728133