The favourites for the first true securitization are Dubai, Indonesia and Malaysia. All are expected to produce Islamic securitization transactions next year.
Islamic finance is necessarily driven by asset-backed finance (it has to be for sharia compliance) and this lends itself well to securitization. But the first true securitizations have been frustrated by a combination of unique Islamic structuring concerns and the usual emerging markets considerations.
The Islamic challenges include finding a guaranteed minimum return for investors, limiting or capping risk, the provision of guarantees and hedging arrangements (where scholars are not all in agreement).
There were a number of Islamic-compliant structured transactions in 2006, such as the Dubai Palm Island financing, that came close to the first securitization. But they relied on external credit support to provide cash backing for 100% of the deal. Deals such as the Blue City Oman financing and the PCFC Dubai Ports sukuk were also exciting developments, but not the groundbreaking structured transaction the market was hoping for.
These deals, particularly the PCFC sukuk, have created a new way of thinking on how to develop Islamic products through partnership structures, or musharaka joint ventures, and will form the basis for the coming year’s asset-backed securitizations.
Hurdles to structuring the first securitization also exist on the civil side, such as transfer of title and prohibitions on foreign ownership. These are difficulties common to any emerging market, and like any emerging market they will hold back the rate of issuance in Islamic securitization but will be gradually overcome.
The prohibition on foreign ownership of assets in some prominent jurisdictions makes structuring deals difficult, while civil registration mechanisms were not designed with securitization in mind. In Jordan, for instance, in order to transfer title on property the seller must turn up, in person, with the buyer at the relevant registration office.
But over the last year there have been pushes to expand capabilities at banks in the Middle East region, and leading structured finance lawyers from Europe are following. At the same time, rating agencies are now comfortable with the various insolvency codes, where big steps have been made in the Middle East region. And there is a lobbying process underway to demonstrate the advantages of updating civil procedural rules.
Lawyers are confident the obstructive rules will be changed, and that governments can be convinced to make the correct policy decisions and allow the templates to be developed to facilitate a new area of structured finance.
“The opportunities are there,” says Salim Nathoo, partner and head of securitization at Allen & Overy. “As the market has grown so rapidly, there are an awful lot of assets being originated and people are looking at securitization as a refinancing tool. There are more conferences than deals at present, but quite a number of transactions will be closed next year, setting a template for the market.”
Elsewhere, the pipeline for emerging markets securitization in general looks good for the year ahead. Lawyers surveyed by IFLR report that banks are making a lot of noise about deals originated in Russia and Turkey. And lawyers are optimistic about the prospects for securitization as a funding and refinancing tool in project and infrastructure finance, where investment banks are predicting bank lending will come under pressure from new capital requirements.
