THE JAZZ III hybrid CDO, managed by Axa Investment Managers and lead arranged by Merrill Lynch in July 2006, was arguably the highlight public market structured credit trade of the past 12 months. Launched amid a bout of investor nerves over the potential for widening credit spreads and rising volatility, the deal enables the manager to go short up to 10% of the total value of $3 billion, and to invest across a range of bonds, loans, credit default swaps, asset swaps and total return swaps referencing 140-odd names. It includes a liquidity facility of almost half the deal value to let the manager leverage up and permits short-term arbitrage trading between cash and derivatives as well as longer-term directional credit investing.
It’s the exemplar for a new range of highly flexible CDO structures.
One unusual aspect of the deal that the CDO market anoraks could perhaps be forgiven for overlooking when it was launched was the key role played by Samba Financial Group. "We were one of the originators of that deal with Merrill, which started out as a $1.5 billion transaction and grew into a $3 billion CDO," says Eisa Al-Eisa, managing director and CEO of Samba Financial Group. "And we underwrote one-third of it on day one."
Come again: what on earth is a Saudi Arabian bank doing playing a lead role in one of the most highly complex, innovative corners of the European structured credit markets? Shouldn’t banks like Samba be concentrating on project financing state-run oil production infrastructure?
Samba has a long-term $12 billion investment portfolio which it allocates across assets, including to hedge funds, private equity and credit structures. That deal came about in large part out of its desire to put some of that money to work and its assessment of asset classes and managers. Having done all that selection work and given its connections to Axa, Samba decided it would be silly to leave all the investment banking fees on the table for somebody else. So it joined Merrill Lynch, which brought global distribution, as one of the leads. The way Samba sees it, its cost of making that investment is reduced by sharing in the investment banking fees.
It’s a supremely confident, hard-headed approach and it typifies the sophistication, aggression and determination of Saudi Arabia’s leading bank, as it finally emerges fully from the shadow of its previous ownership and management by Citi. The historical links with Citi ended in 2003 when the American bank sold down its remaining 20% stake in a group that had been formed to take over Citibank’s operations in the country in 1980.
Many feared possible stagnation and decline at Samba once it fell under full Saudi ownership and control. Instead, the exact opposite occurred: Samba has thrived amid the Saudi economic boom, producing sparkling financial results. For 2006, a year defined by the wrenching collapse of the Saudi stock market, Samba recorded a return on assets of 4.5% and a return on equity of 37%: this for a bank that might be considered overcapitalized at 16%.
It is a savvy and resourceful institution that has invested in people and technology to make up for a lack of bricks and mortar. With just 60 branches in the Kingdom compared with 400 for rival Al Rajhi and 200 for National Commercial Bank, Samba nevertheless commands a leading 23% of the country’s deposit base and 40% of brokerage volume. As well as being a leader in arranging IPOs, it is testing the boundaries in the Kingdom, for example launching innovative Islamic currency and interest rate swaps for corporate customers, devising capital guaranteed international stock baskets and repackaged hedge fund exposures for wealthy private clients. Samba’s management team is bristling with energy and ideas.
It will need both. An array of new competitors, thirsting to suck vitality from the Saudi growth story, stands poised to enter the Kingdom.
A near tripling of the oil price has sparked an extraordinary boom. Brad Bourland, Samba’s chief economist, unearths one of those simple, telling measures that convey the true magnitude of what has gone on. "An economy equivalent to the size of Malaysia has been added to the Saudi economy since 2002, mainly due to rising oil prices."
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"The changing landscape of Saudi Arabia is sometimes deemed only as a negative from the local banks, while we see it as a significant positive"
Eisa Al-Eisa, Samba |
The past four years have been a golden age for Saudi Arabia and for the government as the main beneficiary of the huge revenues from a tripling in the oil price. But that phase is over. Oil prices might perhaps stabilize at around $50 to $60 a barrel, but they aren’t going to triple again. The Saudi economy is now entering a second phase of development as those oil-related government revenues are deployed to underpin a range of mega-projects across the country, by no means all related to oil and petrochemicals. The key to Saudi Arabia’s future is the prominent role of the private sector in these.
Al-Eisa says: "We see non-oil private sector growth of 7.1% for 2007, better than it has been for many, many years, as the mega-projects move from being ideas to implementation. Among the highest-growth sectors, we see wholesale and retail trade at 9.5%; transport, storage and communications, which includes the two new airlines and telecoms, at 11.8%; construction at 9.5%; manufacturing, mainly from certain Sabic projects coming on stream, at 13%; and finance, insurance, real estate and business services at 10%."
A banker’s dream
A booming medium-sized economy with a newly liberalized, invigorated and fast-growing private sector is a banker’s dream. The banking and financial sector itself is poised for dynamic change. There will soon be 22 commercial banks in a country that previously supported 10; 49 newly licensed operations in the area one could broadly define as investment banking; 13 new insurance companies, most being joint ventures with the biggest international names, with another 18 under consideration.