Download October 2014 – Graduate School of Business

Housing Finance for Sub-Saharan
Africa
Wednesday 8 October
Securitisation Case Study
Simon Stockley
Objectives
•
Practical aspects of theory learnt.
•
Tools to use in your business.
•
Respond/predict where global capital markets are headed post 2008.
•
Generate discussion/interaction.
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.
Annual securitisation by asset class
50
Billions (R)
•
30
Syntheti
c
ABS
20
CMBS
40
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
“Happy Days,” SA Capital Market’s
Issuance Levels 2000 - 2006
40
35
Total
issuances
Billions (R)
30
25
20
Securitised
bank
issuances
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
“Happy Days Continued” – Cost of Funds
2001 - 2006
Cost (%)
Blended cost of funds
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Thekweni 1
Thekweni 2
Thekweni 3
Thekweni 4
Current Market Overview – Securitisation
Market
Market Overview – Securitisation Market
5
Evolution of Spreads - Price at Issuance for AAA-Rated securitisation
Evolution of spreads – Price at issuance for AAA – rated securitisation
bps
260
195
Trend in 5-year Financial Sector spreads since Jan 2012 to date
130
65
0
0
1
2010
Source: Standard
Bank Research
2
2011
3
4
2012
5
Years to maturity
2013
South African Mortgage Market Overview
• 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.
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”.
Traditional Bank Funding - Home Loans
Reserving Requirements
Deposits
Short term
3 years max
Bank
Margin: 4 – 5%
Mismatch
Dead capital
Contamination
Loans to
Public
Long term
20 years min
SA Home Loans Securitisation Structure
Control
External Auditor
Independent Trustee
Public
Loans to
Public
Jibar + 2.1%
Special
Purpose
Vehicle Trust
Senior
Securities
Institutional
Investors
Subordinated
Securities
Origination & Management Fee: 0.5%
Investment Structure
Public
Loans
Jibar +
2.1%
Special
Purpose
Vehicle
R1.25 Bill
SAHL
Standard Bank
Deloitte & Touche
A Class
92 %
AAA Rating
Jibar + 70 points
B Class
8%
BBB Rating
Jibar + 230 points
C Class
2.5%
Unrated
Pay away
1.6% to
Investors
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)
KSA International Sukuk Company 1
Residential Real Estate Backed Securities Transaction
Investor Presentation
May 2006
Overview of the KSA Residential Real
Estate Market
Distribution of KSA loans
by lenders
Installment companies
•
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:
Government
Developers
Commercial banks:
Islamic
Commercial banks:
Coventional
Property ownership
Apartment owned

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.
Vila rented
Vila owned
Apartment rented
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.
Sharia Compliant Ijara or Istisna Lease
Structure vs. Traditional Mortgage
Finance
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
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 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 36-months from date of issue
Legal Maturity
2025
Listing
Bahrain Monetary Agency (BMA)
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
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 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”.
Thank You
Simon Stockley
Contact details:
Email:[email protected]
Cellular Phone:+27832760068
Website: www.catalis.co.za