Home finance, real estate and bank balance sheets to drive long-term potential for securitisation in Gulf, Moody's reports

The report explores the key drivers Moody's believes are behind the future growth of a securitisation market in the GCC. Firstly, home finance is still relatively new in the region and despite current events, the long term demand for housing is predicted to grow steeply given predicted demographic and immigration patterns.

Khalid Howladar, a Moody's Vice President -- Senior Credit Officer and author of the report, explains:

"Both the public and private sectors in the GCC have been heavily focussed on the supply side of the real estate equation but the demand side too needs major funding -- especially in the current environment."

Real estate is still key to the future growth for many of the governments in the region. "Funds are needed for the construction of these homes, but many local banks are over-exposed to the sector. As a result, the market -- including securitisation - is likely to cover an increasing portion of the financing going forward."

Moody's also notes that the loan and equity market has been so far the dominant form of financing in the GCC. "Currently the local debt/sukuk capital market is small at a around $70bn, of which only around $4bn are securitisation transactions," Mr. Howladar continues. "This compares with the $12 trillion of oustanding asset-backed financing globally. The local bond market, in all its various forms including Sukuk and securitisation, is essential to the region's future development."

Securitisation also offers banks a means in meeting their financial/balance sheet objectives such as risk transfer and reducing asset/liability mismatches. Despite the currently difficult environment, the first half of 2008 has still seen approximately $1.5 trillion of global securitisation issuance from (mainly) banks as they restructure their balance sheets and take advantage of central bank liquidity facilities available for rated asset-backed bonds.

A further positive factor is that some of the local regulators have taken note of the potential of asset-backed financing. "The Dubai International Financial Centre Authority has recently been active, passing legislation facilitating the creation of the special purpose vehicles that are key for structured financed transactions. Central banks too have recently made statements regarding such 'vehicles' to help provide liquidity. Government entities in Kuwait and Saudi Arabia have also been considering laws to help facilitate transactions in their own markets," says Mr. Howladar.

However, Moody's cautions that the nascent legal environment has seen little in the way of large-scale bankruptcies, which creates significant uncertainties with respect to the enforceability of the security mechanisms required in asset-backed structures.

The report, entitled "Securitisation in the Middle East: Exploring The Untapped Potential of the Region" aims to serve as a securitisation primer for market participants unfamiliar with this form of finance and provides some insight into the possible drivers for securitisation in these new markets. It focuses primarily on the six countries which comprise the GCC: Kuwait, Qatar, Oman, Kingdom of Saudi Arabia (KSA), Kingdom of Bahrain and the United Arab Emirates (UAE) as this is where Moody's currently sees the most potential for rated securitisations. Mr Howladar will also be addressing market participants at the Euromoney Securitisation event on November 18th at Jumeirah Emirates Towers, Dubai.