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Securitisation is a relatively new concept in the GCC, but its potential is huge given the flood of quality real estate asset pools being developed.
Securitisation and alternative fixed-income instruments are building base fast in the GCC, and the breaking news in the sector is Abu Dhabi property developer Sorouh's plan to raise 4 billion dirhams ($1.09 billion) by selling asset-backed securities that comply with Islamic law to finance infrastructure projects.
What are the factors that favour securitisation in the region?
The huge surplus liquidity in the region is chasing more value-added products. Even high net worth investors (HNWI) are constantly demanding more sophisticated investment products to the usual suspects with a greater range on the risk-reward spectrum. GCC institutions and investors are also now increasingly willing to underwrite such products.
Securitisers are now looking at asset classes like private equity and project finance.
Worldwide securitisation volume declined to $19.2 billion in February 2008, according to Thomson Financial, the lowest monthly volume since January 2006, but the GCC securitisation experts are still eager to launch new transactions and models.
Maan Kantar, head of structured products and product development division, Gulf Investment Corporation (GIC), says that the sector is at a critical point, despite current market troubles. "What we're seeing in the securitisation market now is major," he says.
"It's an event that happens once every 10 to 15 years. The whole business is changing."
Securitisation is one of the most efficient tools to reduce risk: let's say an investment of 100 units is too risky: by securitising it and creating several tranches, you can create a very low risk part for 50 and a very high risk part for 50, so you can cater to the investors' demands and also change the profile of the investment you held initially.
GIC has been looking at securitising private equity and project finance, both of which are usually extremely long term instruments and traditionally only bought by a limited number of participants.
Traditional private equity investors, for example, do not receive any regular returns until the fund has exited its positions.
"Securitising can create a fund or pool of assets, from which you can extract regular payments, and even a certain level of security," says Kantar, "which is not present in the traditional market. Basically, as long as you can create a diverse pool, of a stable and reliable asset class, and slice it, you can create different levels of return, different levels of security to cater for different investors ranging from the equity type to the AAA type."
In a private equity securitisation, to create liquidity, it may be necessary to hold onto some reserve capital in order to make the first repayments to investors before the fund has acquired income-generating businesses or generated income by divesting them.
"There are two types of securitisation: you have amortising securitisations where investors are paid back as the initial assets are amortising, but you also have securitisations that are reloaded all the time, where new assets keep on replenishing the pool," Kantar says.
For trade receivables, which typically have a 90-day duration, a securitisation might extend the investment into a three-year term. As trade receivables are amortised, they would then be replaced by new ones, subject to predefined conditions and requirements. This will attract investors who like duration.
Kuwait-based Rasameel Structured Finance, the GCC region's pioneering asset securitisation company, is in the process of setting a subsidiary in Bahrain, aimed at marketing and selling down securitisation and capital markets products to investors and institutions in Saudi Arabia, Qatar, UAE and Bahrain. It is also establishing a regional hub in Kuala Lumpur to explore opportunities in Malaysia, Singapore, Indonesia, Brunei and beyond.
But some bankers' willingness to run down securitisation as the root cause of the credit crunch looks severely lop-sided.
If the Bank for International Settlements and other regulatory bodies heavily restrict banks' ability to repackage loans as bonds, it would do more harm than good for at least two reasons.
Securitisation is integral to our ability to meet society's financing needs, from business to new homes and college education. Returning to the old days of banks buying and holding the loans they make is unrealistic.
Secondly, securitisation need not be inherently more risky than other forms of raising finance, such as venture capital, which remains an essential part of the economy despite the irrational exuberance of the dot-com era.
The difference between securitisation and venture capital is that the sober venture capitalist, operating in the unregulated world of business startups, spends a lot of time doing due diligence. So investment risk tends to be appropriately priced in the primary and secondary market. If the businesses seeking funds don't provide enough of the right information, they don't get the capital.
In the regulated world of banking, it's up to the authorities to inject some of that discipline into the selling and marketing of asset-backed securities.
Also important is making banks keep a balanced mix of securitised assets on their books rather than the recent habit of holding the AAA-rated tranche and selling the rest. That would avoid poor quality assets becoming concentrated in some investors' hands. The same requirement should be made of banks investing in these securities.
The best outcome for regulators and stuttering developed-world economies is to encourage banks to do more, not less, securitisation by making it easier for everyone to understand.
