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Objectives

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. .

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Objectives

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  1. Housing Finance for Sub-Saharan Africa Wednesday 8 October Securitisation Case StudySimon Stockley

  2. 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.

  3. Case Study 1 – Thekweni Securitisation Program

  4. 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.

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

  6. “Happy Days Continued” – Cost of Funds 2001 - 2006

  7. Current Market Overview – Securitisation Market Evolution of spreads – Price at issuance for AAA – rated securitisation

  8. 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.

  9. 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”.

  10. Traditional Bank Funding - Home Loans Reserving Requirements Bank Margin: 4 – 5% Deposits Short term 3 years max Loans to Public Long term 20 years min Mismatch Dead capital Contamination

  11. SA Home Loans Securitisation Structure Control External Auditor Independent Trustee Special Purpose Vehicle Trust Public Senior Securities Loans to Public Jibar + 2.1% Institutional Investors Subordinated Securities Origination & Management Fee: 0.5%

  12. Investment Structure A Class 92 % AAA Rating Jibar + 70 points Special Purpose Vehicle R1.25 Bill Public B Class 8% BBB Rating Jibar + 230 points C Class 2.5% Unrated Loans Jibar + 2.1% SAHL Pay away 1.6% to Investors Standard Bank Deloitte & Touche

  13. Legal structure

  14. 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.

  15. Case Study 2 – Kingdom of Saudi Arabia Residential Real Estate Backed Securities (RRBS)

  16. Overview of the KSA Residential Real Estate Market • 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.

  17. 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.

  18. Sharia Compliant Ijara or IstisnaLease Structure vs. Traditional Mortgage Finance 2. Title and deed Seller Financier (Lessor) 1. Purchase price 3. Ijara Finance Lease or Istisna Agreement 4. (Mortgage) 6. Final payment 5. Rental payments 7. Title and deed Buyer (Lessee)

  19. 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.

  20. KSA MBS 1 - International Sukuk Company Bond Structure.

  21. Guarantee Structures, Possible under Sharia

  22. Terms of Issue

  23. Reputable International Administrators

  24. 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.

  25. 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”.

  26. Thank You Simon Stockley Contact details: Email:stockley@catalis.co.za Cellular Phone:+27832760068 Website: www.catalis.co.za

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