Lebanese rental fleet securitization breaks new ground
The Kurban Group, a Lebanese travel conglomerate, recently closed on a rental fleet securitization that, despite its small size, represents some notable "firsts."
The $25 million transaction is backed by the rental fleets of three separate operating companies: MECAR , the local agents of Avis Rent-a-Car; FMC, the local agent of Budget Rent-a-Car; and Allo Taxi.
Not only is ABA SEC I MSF the first rental fleet securitization in the Levant region, it is also the region’s largest securitization of any kind, outside of mortgages, according to Abdallah Nassif, head of structured finance at SaudiMed, which served as a technical adviser to the deal’s lead manager, MedInvestment Bank. And it is the first securitization in the Middle East of any asset class with a multiseller structure. Previous deals have included auto loans, auto leases, trade receivables, vehicle inventory, mortgages and a single asset-backed commercial paper conduit. None were larger than $15 million.
ABA SEC I also has some features that make it more tax efficient than it would be if it were structured like a typical U.S. or European rental fleet transaction, according to Nassif.
U.S. and European rental fleet securitizations are sale-and-leaseback transactions. A special-purpose vehicle issues bonds, uses the proceeds to acquire a rental fleet and leases the vehicles back to the sponsor. That means the performance of these bonds is closely linked to the financial health of the sponsor. By comparison, the performance of bonds backed by retail auto loans is more closely linked to the financial health of the consumers. In both types of deals, however, the bonds are ultimately supported by the value of the vehicles.
Instead, ABA SEC I is structured as a secured loan transaction. A third party provided a revolving secured loan to each of the three operating companies; these loans are secured by a pledge on the vehicles. The securitization trust uses proceeds from the issuance of notes to purchase these three loans from the third party, making the SVP the lender of record and the beneficiary of the pledge on the fleet.
The three operating companies now pay monthly interest and principal on the secured loans that is calculated exactly like the rental payments in a sale-and-lease back structure: The principal will be equal to depreciation plus the net book value of cars sold, and the interest payment will be equal to senior expenses plus coupon to investors plus the net book value of any lost vehicle plus other charges). Moreover the size of the secured loans was equal to the net book value of the pledged vehicles.
“The pledge that we have on the cars is very strong and efficient,” Nassif said in an email. “In Lebanon it as powerful as owning the vehicle and the foreclosure process thereon is tested and straightforward. This adjustment allowed us to optimize the structure from a tax and regulatory perspective with no change to substance. “
As with many Levant deals, the sponsor did not seek a credit rating because the sovereign ceiling of Lebanon is in the single-B area. That means securitization does not add a lot of value, even if the deal itself merits a high rating. The deal’s relatively small scale also made a credit rating impractical.
Another reason it did not make economic sense to seek a credit rating: the sponsor was able to achieve a favorable risk weighting of 75% for the senior notes. That’s below the 100% cap for unrated senior notes.
The deal, which is conventional and not Islamic, closed on Oct. 31. It was placed with regional (mainly Lebanese) banks and a regional fixed-income Funds. Four classes of notes were issued in the transaction. The $21 million tranche of senior notes with an expected weighted average life of 4.75 years was offered to local and regional investors; three tranches of junior notes were retained by the originators. The deal has a replenishing period of 3.5 years.