The Sukuk Summit – Strategies for Today: Demystifying Islamic Capital

Markets (ICM) Products

London June 21st , 2007

Securitization in the GCC – Opportunities and Challenges

Issam Al Tawari, Vice Chairman - CEO

• Who are we

• What is Securitisation

• Benefits of Securitisation

• Opportunities in the GCC

• The First Deals

• Why Now ?

• Securitisation main Challenges & Opportunities

• A look at the future

Agenda

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We are a securitization house & financial engineering specialists in Islamic Debt arrangements focused on the GCC as a primary market.

Rasameel first licensed securitization/ investment company by The Central Bank of Kuwait

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Who Are We..…

• In securitisation, a corporation creates and

‘securitises’

assets - that is, transfers assets in form of securities.

• The claim is on assets, and not on the entity

• Hence, asset-backed risk

Sukuks (asset based) are a step towards

securitisation (asset backed) similar but different …..

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What Is Securitisation … How Is It Different

In Sukuks:

o Typical asset is not rated but the strength of

corporate undertaking

o Asset transfer not perfected necessarily

o Cash flow segregation only a book entry

o Amortization of Sukuk is achieved by sale of

assets back to originator rather than assets

performance ( Dibashish ,Clifford Chance)

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Sukuk / Securitisation Differences

• The key economic driver of securitisation is lower cost, resulting out of:– Credit enhancement– Higher ratings

• Bankruptcy remoteness• Capital Market Funding• Other spin offs – off balance sheet,

capital relief, etc. are consequences, not cause of the isolation process

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Benefits of Securitisation

Securitisation Benefits 1. Lower cost - inherent cost and weighted average cost 2. Frees up regulatory capital

3. The best example of economics of securitisation is an arbitrage CDO

4. Improves capital structure

5. Alternative investor base -institutional and retail 6. Higher trading on equity with no increased risk

7. Matching of assets and liabilities 8. Extends credit pool

9. Issuer rating irrelevant 10. Not regulated as debt

11. Multiplies asset creation ability 12. Reduces credit concentration

13. Non-conventional source; may allow higher funding 14. Risk management by risk transfers

15. Off-balance sheet financing - removal of accounts 16. Arbitraging opportunities - repackaging transactions

17. Improves accounting profits 18. Avoids market rate risk

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Securitisation Benefits

• Talked about as concept back in 1990’s• Market acceptance now:

• Tradability and liquidity it posses • Sharia closer understanding• Legal structures improvements• Growth of Sukuk market

• Basel II – Changes in Asset Retention Strategies a Basle II

bias toward banks holding securities instead of direct exposures. (Thomas,Abdelakder,2007)

• Islamic Capital Market development

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Opportunities In The GCC

• MENA 0.2% of Global Market ( Moody's)

• Kuwait: – US$ 5/ 15 bn in Islamic & Conventional

receivables respectively • UAE:

– Mortgage market most active AED 11.5 Bn residential mortgage in Dubai( Moody's)

Saudi Arabia:

– US$ 5 bn est. RE Finance in 2004– 20% of population owning their properties– 65% of mortgage is provided by banks but with

restrictive criteria – KSA MBS 1 US$ 23 mm securitization issue with

partial recoursePage (8) of (15)

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Opportunities In The GCC (cont.)

• The largest and fastest growing funding tool in the

international capital markets

• Current ABS outstanding estimated to be in excess of

$5 trillion

• Annual issuance in Europe, Middle East and Africa

exceeds $600 billion. (Source HSBC)

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What Is The Size Of The Securtisation Market

Initial Securitisation Transactions in Kuwait Year Deal Size Remarks

2003 Manar & Investment Dar

KD 5.3 mm 15% recourse to originator/ Unrated

2005 Investment Dar US$ 150 mm Musharaka Sukuk / Rated by CI

2006 Aayan Leasing & Inv. US$ 100 mm Musharaka Sukuk / Rated by CI

2006 KCMCC US$ 30 mm Usufruct Leases BOT

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Where Deals Are Done In Kuwait

• Market Orientation• Clients/originators insufficient IT system reports

• Portfolio Data• Market Data

• Legal & regulatory framework shortcomings• Civil law jurisdictions are typically limited to

Debt issues, but not Islamic securitization;• No specific securitisation law yet• Enforceability of legal opinion?

– Can a Security Interest be perfected– Ratings implications

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Securitisation Main Challenges

• Law not permit sale of Kuwaiti assets abroad

• Lack of local SPV need for 2 tier structure

• Transaction size matters , many SME originators

• Lack of government sponsored agencies such as Ginnie Mae and Fannie Mae

• Lack of (deep) capital markets

• Targeted securitised assets denominated in Local currency

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Securitisation Main Challenges (cont.)

• New securitisation directives by the Central Bank of Kuwait under review

• Sovereign originators may be targeted for the next wave after corporates.

• Future flow securitisation will be the way forward for many originators

• Islamic securitisation will be a key driver for the market growth to feed the secondary Sukuk market

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The Future Of Securitisation In GCC

THANK YOUTHANK YOUwww.rasameel.com

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