Lebanese securitizations are certain to explode onto the scene following the launch of the country's first transaction earlier this year by the Banque Europeanne pour le Moyen-Orient Securitizations (BSEC). Sources said the ABS market is toying with a number of ideas that are expected to materialize as early as next month.
"Looking at the market, it's the real estate related deals that are very well appreciated; the main drivers at this point are CMBS, single-credit CLO's, and hybrid convertible bonds (for real estate companies)," said Iyad Boustany, vice president at BSEC. The Lebanese market's inaugural issue is a $6 million deal BSEC led for Solidere, the real estate company in charge of rebuilding the Central District in Beirut. The SPV, Indigo Trust, issues credit-linked notes that mature in April 2005 and offer a fixed, yearly return of 5.75%. The notes bear a call option on Solidere shares on the maturing date, meaning they can outperform the minimum guaranteed yield in the event of a share price increase.
It's this booming real estate scene that is largely responsible for the drive behind the securitization market appeal. With large retail companies popping onto the landscape - such as Carrefour and BHV/Monoprix - borrowing money from banks or issuing debt with a high annual yield is not the financing alternative these companies seek. BSEC said that it is in the running for several CMBS transactions.
Counted as the first financial institution to introduce locally structured derivative products in a region that has maintained a relatively quiet and sluggish approach to the securitization market, BSEC has been around since 1994. For the past 10 years, Lebanese investment banks have been trying to enter the market, but insufficient deal flow led to downsizing for many. In the current uncertain economic environment, however - with high interest rates matched with illiquidity and a sub-investment-grade sovereign rating - traditional bank funding simply lacks the efficiency to deal with the new crop of retailers' huge demand for long-term financing.
Bank securitizations are also expected because of two new factors in the market place: the lack of liquidity in the Lebanese banking sector coupled with an increase in the cost of funds - a strong incentive for banks to move towards securitization. Additionally, the new Basle accord, that is expected to increase the cost-of-capital requirement with respect to sub-performing loans, will act as another incentive for banks to clean their balance sheets prior to the implementation of the Basle II.
In 1996, Lebanon enacted the trust law, a rarity among its neighboring countries and even among civil law countries such as France and Luxembourg. In essence, the law allowed Lebanon securitizations to use a bankruptcy remote vehicle. BSEC is using the ability to establish local vehicles to attract smaller-sized issuers - a middle-market option for corporate funding. It's a viable alternative for smaller corporates as opposed to the very expensive, French-based Fonds Commune de Creances (FCC) or a Cayman Island SPV that generally incorporates huge legal counsel fees, said Boustany.
At the moment, BSEC is keeping busy with the five mandates it has already secured, including an additional $24 million for Solidere, a forthcoming $100 million single-credit CLO, $5 million of currency-linked originated notes, and a $50 million CMBS dubbed Titiriland. "Here at BSEC, we focus on medium-sized transactions," added Boustany. "The large transactions like privitization generally appeal to international companies and they tend to structure the deals by themselves."
Nonetheless, BSEC's long-term strategy is not limited to the domestic market; in the future, it counts on attracting a joint business approach with international banks. "Our services are fully complimentary to international investment banks and our business model makes sense for both parties," said Boustany. "We - a medium-size regional player - run for the mandates (i.e. incur the fixed cost), and once we have a transaction at hand, we join forces with an international player in order to benefit from its huge sales capacity."
It is a win-win relationship and a business model that works for securitization in the emerging markets, where two contradictory objectives have to be met - dedication through continuous presence, and flexibility within the cost structure. Some of the players BSEC is currently working with are Merrill Lynch, Deutsche Bank and Lehman Brothers.
More on the way
Analysts at Fitch Ratings said they have received several inquiries, all in preliminary stages, for possible future transactions emerging from Lebanon. The country's parliament is currently considering developing a vehicle similar to the French FCC; in Lebanon, however, the vehicle would not be restricted to solely purchasing receivables. The Lebanese conduit would allow for any type of asset - fixed, moveable or intangible - to be transferred to the SPV.
In addition, the market saw the introduction three months ago of statute 430, which allows the securitization of government assets. At the moment, the government is considering future-flow securitizations of tobacco receipts or of the tariff levied on imported tobacco. Although the tobacco-receivables securitization is still in its preliminary stages, sources said that the government hopes to bring the deal to market by the end of this year. A securitization of telecom receivables is also a possibility.
One possible hitch, however, is that statute 430 on government securitizations clearly states the reduction of debt as its main objective; Eurostat (see ASR 5/6/02), however, recently ruled that future-flow government securitizations cannot be eligible for true sale accounting and would be recorded as on-balance sheet debt. The tobacco securitization and the telecom deal would probably lead to an increase in government debt, which could expose the statute to a motion for annulment. According to Boustany, even if this did not happen, secured lending would likely trigger the negative pledge covenants as mentioned in the Lebanese Eurobond offering memorandum.
"As for the tobacco securitization, it seems that the previous granting for public service concession expired years ago without being renewed," he said. "This raises a legal issue, which is yet to be solved: what is the legal status of a monopoly once it has expired? If perfected legal interest in the underlying asset has to be obtained before moving ahead with securitization then all the legal issues have to be cleared before any deal is closed."