Housing Finance for Sub-Saharan Africa Wednesday 8 October Securitisation Case Study Simon Stockley.

Housing Finance for Sub-Saharan Africa

Wednesday 8 October

Securitisation Case Study

Simon Stockley

• Practical aspects of theory learnt.• Tools to use in your business. • Respond/predict where global capital markets are headed post 2008.• Generate discussion/interaction.

Objectives

Contents

• Thekweni program vs. traditional bank funding.

• KSA Residential Real Estate Backed Securities (RRBS).

• Lessons learnt along the journey.

• Q&A.

Case Study 1 – Thekweni Securitisation Program

Current Market Overview• Securitisation is gradually returning as a source of alternative financing in the South

African Debt Capital Market.

• Post 2008/2009 crisis, issuance levels spiked around 2011, when a number of bank

RMBS deals were being refinanced.

• The demand is largely due to a return in investor appetite for credit risk, an increase

in liquidity and the need for product diversification.

• Securitisation issuance over the past 2 years has been limited to the established

issuers, such as SA Home Loans, BMW, Eskom home loans.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201205

1015202530354045

Annual securitisation by asset class

Synthetic

ABS

CMBS

RMBSBill

ions

(R)

2000 2001 2002 2003 2004 2005 20060

5

10

15

20

25

30

35

40

Total is-suancesSecuri-tised bank issuances

Billions

(R)

“Happy Days,” SA Capital Market’s Issuance Levels 2000 - 2006

Thekweni 1 Thekweni 2 Thekweni 3 Thekweni 40

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Blended cost of funds

Cost

(%

)“Happy Days Continued” – Cost of Funds

2001 - 2006

Current Market Overview – Securitisation Market

Evolution of spreads – Price at issuance for AAA – rated securitisation

• Sophisticated and mature.

• Dominated by Big 4 Banks (5/Capitec?).

• Sound legal structure – title & foreclosure.

• Wide margins – no real competition on price, prior to

1998.

• Historically no non-bank lending prior to launch of SA

Home Loans.

• Traditionally South African banks are “cash rich” and well

capitalized shortage of capital; dynamic changing.

• Credit data is comprehensive.

• Deep and advanced capital markets.

South African Mortgage Market Overview

Why No Securitisation Prior to December 2001?

• Big is best.

• Rating agencies.

• Exposure to international markets.

• Legal framework not securitisation friendly; no

securitisation regulations prior to 2001.

• Little incentive for banks to securitise.

• No ability to reinsure first loss position.

• Investor education needed.

• Took a “disruptive force”.

Reserving Requirements

Loans to PublicLong term

20 years min

Bank

Margin: 4 – 5%

DepositsShort term

3 years max

MismatchDead capitalContamination

Traditional Bank Funding - Home Loans

Control

Institutional Investors

Special Purpose

Vehicle TrustPublic

Origination & Management Fee: 0.5%

External Auditor

Senior Securities

Subordinated Securities

Independent Trustee

Loans to Public

Jibar + 2.1%

SA Home Loans Securitisation Structure

Public

Special Purpose Vehicle

R1.25 Bill

Loans Jibar + 2.1%

SAHL

Standard BankDeloitte & Touche

A Class 92 %

AAA Rating Jibar + 70 points

B Class 8%

BBB RatingJibar + 230 points

C Class 2.5%

Unrated

Pay away 1.6% to

Investors

Investment Structure

Legal structure

Advantages of the Structure vs. a Traditional Bank Funding Model

• Ability to ring fence asset classes and risk profiles.

No cross contamination on default.

• Allows more thinly capitalised entities to access the

capital markets, at competitive pricing.

• Matches term funding more closely with underlying

assets.

• Allows investors to price more appropriately for risk.

• Encourages competition/benefits consumers.

• Lower pricing.

Case Study 2 – Kingdom of Saudi Arabia Residential Real Estate Backed

Securities (RRBS)

• 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.

KSA economy represents 50% of GDP of GCC.

Distribution of KSA loans by lenders Installment companies

Government

Developers

Commercial banks: Is-lamic

Commercial banks: Coventional

Property ownership

Apartment owned Vila rentedVila ownedApartment rented

Overview of the KSA Residential Real Estate Market

Saudi Arabia Mortgage Finance Market

Constraints:

• Lack of specialist mortgage finance firms. Banks focused on

commodity finance and consumer lending.

• Lack of long term liquidity in the mortgage finance market.

Shorter dated financing more readily available.

• Lack of consumer education with regards to mortgage finance.

• Lack of commitment to the industry by the majority of players.

• Lack of a regulated legal system.

• Lack of a developed swop market.

Seller Financier(Lessor)

Buyer(Lessee)

1. Purchase price

2. Title and deed

3. Ijara Finance Lease or IstisnaAgreement

5. Rentalpayments

4. (Mortgage) 6. Final payment

7. Title anddeed

Sharia Compliant Ijara or Istisna Lease Structure vs. Traditional Mortgage

Finance

Sharia Compliant Structures

• All major/structural maintenance is The Lessor’s responsibility.

• All minor maintenance, due to daily wear and tear, is the Lessee’s

responsibility.

• Lessor, responsible to obtain and maintain all required insurance policies.

• 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.

• Pre-payment 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 Lessor’s responsibility.

KSA MBS 1 - International Sukuk Company Bond Structure.

Guarantee Structures, Possible under Sharia

Terms of IssueTransaction 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

DAAR first loss guarantee to top-up Excess Spread to 10% of original balance

IFC second loss guarantee for additional 10% of remaining principal balance

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 36-months from date of issue

Legal Maturity 2025

Listing Bahrain Monetary Agency (BMA)

Reputable International AdministratorsArrangers 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 the Transaction

• Initially a pilot project but concept proved. Now part of a series of

ongoing issuance programmes. Subsequently replicated across GCC.

• Allowed 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, recognising local market

constraints.

• Demonstrates ability to merge traditional Islamic structure with best of

practice in respect of Western securitisation technology.

Lessons Learnt Along the Way

• Size does count.

• Quality of data/proxy data difficult post 2009.

• Systems and reporting ability.

• Keep it simple (KISS).

• Develop early relationships with the capital markets/reverse engineer

the product if necessary.

• Ratings – involve the Agencies early.

• Post 2009 market’s requires originators to have “skin in the game”.

• Copy unashamedly.

• Timing – market conditions.

• Pricing.

• “Build it and they will come”.

Simon Stockley

Contact details:

Email:[email protected]

Cellular Phone:+27832760068

Website: www.catalis.co.za

Thank You