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Emirates NBD to breathe fresh life into Gulf securitisation market

Bank's Dh920m deal is viewed as a real test of the demand side

Funding option
Image Credit: Megan Hirons Mahon/Gulf News
An Emirates NBD ATM in Dubai. The Emirates NBD securitisation was launched in mid-July and the bank expects toclose the transactions by mid-August.
Gulf News

Dubai: Emirates NBD, the UAE's largest bank by assets, is in the process of completing its $250 million (Dh919.5 million) fund raising through an auto loan securitisation deal.

The deal is expected to revive the interest in the regional asset-backed securitisation deals which was virtually forced into hibernation in its infancy in the wake of the global financial crisis.

The new issue from Emirates NBD is viewed by the regional financial services community as a real test of the demand side of the securitisation market.

The Emirates NBD securitisation was launched in mid-July and the bank expects to close the transactions by mid-August. The notes denominated in Japanese yen and the underlying assets of the deal are car loans.

The facility with three-year tenor is guaranteed by the Japanese Bank for International Cooperation. The asset-backed securities have a provisional rating of Aa2 from Moody's.

"Through this deal we are bundling our auto loan portfolio to raise funds at internationally competitive rates," Rick Pudner, Chief Executive Officer of Emirates NBD, said last week during a conference call following the announcement of the bank's first-half results.

While the success of Emirates NBD deal could mark a new beginning for the Gulf securitisation market, it could emerge as a new long term funding option for the Gulf banks that have a history of asset - liability mismatches.

In the Gulf, the liability side of the bank's balance sheets is dominated by short-term deposits while the assets have significantly longer term tenures.

In the case of Emirates NBD, at the close of the second quarter, customer deposits stood at 79 per cent of its total liabilities while wholesale debt was just eight per cent of the liabilities.

Historically, the funding gaps and term mismatches of assets and liabilities are bridged by the regional banks through wholesale funding mostly through medium-term notes issues.

Following the financial crisis, wholesale funds have become scarce and expensive for regional institutions.

Promising industry

"The wholesale funding remains challenging in the medium term. The securitisation deals form part of our efforts to augment our medium-term funding," said Pudner.

Over the last couple of years, the Middle East and North Africa and Gulf markets have started to push for more diversity in their financial activities. Securitisation was one of the areas that appeared promising. To some extent markets such as Egypt, Lebanon, Saudi Arabia and the UAE showed significant number of asset-backed transactions during the past four years. However, since the beginning of the financial crisis, issues came to a grinding halt.

Despite the crisis and the difficult conditions that followed, securitisation has strong growth potential in the Gulf, Moody's Investors Service said in Special Comment published in late 2008. According to Moody's the Gulf region's securitisation transactions account for about just $4 billion compared to $12 trillion of outstanding asset-backed financing globally.

Analysts say the regional regulators and financial authorities have taken note of the potential of the asset-backed financing and have moved ahead with several reforms to facilitate securitisation deals.

"The Dubai International Financial Centre Authority has recently been active, passing legislation facilitating the creation of the special purpose vehicles that are key for structured financed transactions. Central banks too have recently made statements regarding such ‘vehicles' to help provide liquidity.

"Government entities in Kuwait and Saudi Arabia have also been considering laws to help facilitate transactions in their own markets," said Khalid Howladar, a Moody's vice-president — senior credit officer and author of the report Securitisation in the Middle East: Exploring The Untapped Potential of the Region.

Securitisation has already demonstrated its ability to structure transactions in regional markets where no specific regulations exist. Most of the countries in the Mena-Gulf regions have yet to enact such regulations. Some countries have or are on the verge of enacting regulations. Others have yet to envisage such reforms and remain a challenge for securitisation transactions. Even in the absence of a precise regulatory regime the region has witnessed a number transactions in the past.

Before the Emirates NBD deal, the most recent rated Gulf asset-backed financing in the UAE was a Dh4.016 billion sukuk issued by Sorouh Real Estate in September 2008.

Other major securitisations in the country included Thor Asset Finance/Dewa, issued in August 2007, UAE CMBS/Arabian Real Estate Trust in July 2007, Tamweel Asset Backed Securities in July 2007 and ENSEC Home Finance in 2005.

"It will be a real test of the market. If there is enough investor appetite, I am sure there will be number of regional issuers keen to tap this funding source," said a senior banker.

Raising funds an innovative process

Securitisation is an innovative fund raising process which came into existence in the late 1970's and has multiplied phenomenally over the years.

The crux of the concept on which this process is based is the grouping or pooling of assets with predictable and pre-defined cash flows structure and re-packaging of such cash flows into financial instruments are then sold to investors. Such cash flows can accrue out of loans, trade receivables, mortgages and royalties etc.

The term "securitisation", itself is derived from the fact that securities are the final mode of financial instruments which are issued to investors to obtain funds. Securitisation involves the transfer of assets to a special purpose vehicle and then the issuing of new securities backed by these assets. These are then sold to third parties. They can be sold in private placement, or possibly listed on stock markets.

As any asset with an associated stream of cash flows can be securitised, the securities which result from a securitisation transaction are termed as asset-backed securities and the transaction itself is termed an asset-backed securitisation.

With more such issuances being based on underlying mortgage based loans, mortgage-based securitisation became widely popular.

In the case of Emirates NBD transaction, its auto loans have been bundled together in the form of notes. These notes, issued by Emirates Auto Financing, are then purchased by Japanese Bank for International Cooperation.