Industry insiders have hailed the issuance of the first two internationally rated securitizations in the Gulf region as a starting shot for a Gulf-region structured credit market. The class A tranche of Tamweel’s $250 million of RMBS bonds, priced through Morgan Stanley and Standard Chartered in mid-July, was given a provisional rating of Aa2 by ratings agency Moody’s, and AA by Fitch. It is one of the world’s first Shariah-compliant securitizations, and the first RMBS in the Gulf. A smaller CMBS securitization of an office block in Dubai was priced a few days later via HSBC, its class A notes achieving a provisional rating of Aa3 from Moody’s.
The debt markets in the Middle East have previously been hampered by the excess liquidity derived from oil revenues. With the announcement early in July that Qatar Islamic Bank also intended to issue a Shariah–compliant MBS, however, securitization seems to be taking off in the Gulf. Indeed, sources say another potentially internationally rated transaction is under discussion, pending the successful sale of the Tamweel transaction.
Registration
But is the future of securitization in the Gulf so certain? According to Khalid Howladar, senior analyst in structured finance at Moody’s, securitization has become more attractive in the Gulf thanks to a wider switch to credit following the downturns in the region’s equity markets over the past 18 months. Moreover, as Michael Hölter, emerging market structured finance analyst at Fitch, points out, although the underdevelopment of the mortgage market in the Gulf offers big potential, it also, for the present, restricts the opportunity for future RMBS. Home ownership in Dubai was given a firmer legal foundation last year with the establishment of a UAE land registry. But in Saudi Arabia, the region’s biggest economy, the mortgage market accounts for just 2% of GDP and a land registry is still to be established.
Yet perhaps a more imminent hurdle the Gulf securitization market has to pass is the lack of legal precedent covering default on payment of debt. According to Howladar, as far as the development of securitization and the associated benefits of increased market depth and stability, is concerned, Dubai is hampered by its own success. "You need to have some defaults and insolvencies for people to see how the courts will behave," he says. Michael McMillen, a lawyer at Dechert, also addresses this issue in his April report Towards an effective legal framework for Islamic finance.
Bubbles
But more than anything, the fear is that there might be a rather brutal remedy for the problem. "Many people have been talking about a property bubble in Dubai for a long time but all bubbles do burst," says McMillen.