Transcript May 2007 – Securitisation.World Mena

March 2007 Dubai
SECURITISATION
WORLD MENA 2007
KSA MBS (I) A CASE STUDY
by
S STOCKLEY
1
KSA residential real estate is witnessing
unprecedented growth and home finance
likewise is growing rapidly
Distribution of KSA Loans by Lenders
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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.
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
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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
Housing Finance Recievables Outstanding (USD)
2004
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KIC started operations in 2000 is the
largest specialized housing finance
company in KSA with a total market
share of 2.28%
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Steadily built a sizeable portfolio
with a strong performance track
record
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Mortgage book of over $450 million
and default rates of less than 0.5%
KIC is a market leader in product
features and client service

Only specialized housing finance
company to offer 20-year
mortgages
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Only housing finance company
offering pricing competitive to
banks
2003
319,483,653
2002
166,602,199
Operating Profit
54,631,698
USD MM

378,130,960
30,510,728
13,362,131
2002-2004
KIC applies conservative lending standards
and closely monitors arrears
PTI
11,375,884
10,102,686
Credit Criteria of the RRBS Pool:

Weighted Average LTV 78.99%

Weighted Average PTI 29.29%
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Lending restricted to major cities
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Legal ownership of asset with
financier until loan is paid off
easing foreclosure

Centralized credit approval process
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
Seasoning
8,564,758
4,117,149
>21mths
&
<=24mths
>18mths
&
<=21mths
>15mths
&
<=18mths
>12mths
&
<=15mths
>9mths &
<=12mths
>6mths &
<=9mths
>3mths &
<=6mths
1,126,781
> 27mths
2,218,080
992,364
110,096 428,889 485,429
>24mths
&
<=27mths
2,653,295 2,921,050
<=3mths
Arrears Management
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55% of accounts paid by direct
debit and post-dated checks
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Personal guarantors of client are
financially liable for client
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Only 1 case of foreclosure in 4
years of operation, and successfully
executed
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Arrears have never exceeded
0.22% of the portfolio and were
0.10% on December 30, 2004
KIC is a leading financier for its sister company
DAR AL-ARKAN (DAAR) one of the large developers
of residential real estate in KSA
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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
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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 :
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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
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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
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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
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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
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In the “sweet spot”
Fundamentals are right!
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Solid economic framework
Strong investor demand
Rating agencies and arrangers present in the market
Reduced credit enhancement and overcollaterilisation
Increased size and frequency of issuances (all asset
classes) and reduced spreads (c.f. SA capital
markets)
SA Capital Markets Issuance Levels
2000 - 2006
20
40
34.64
18
36
16
32
28
23.81
22.04
12
24
10
20
8
16
6
9.97
7.92
12
9.80
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
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Mobile :+27 83 2760068
Fax : +27 866 728133