The socioeconomic and political turmoil that maintains its grip on the Middle Eastern region may be enough to keep cross-border securitization interests at bay, but it hasn't stalled domestic developments in Lebanon.

This year, Lebanon has already seen one deal close, and the country seems to be moving in the right direction. For starters, the Banque du Liban is moving closer to enacting its first securitization law that specifically addresses provisions for securitization. It's still in revision stage, but market sources are hopeful that the law will be enacted by this year-end.

At the government level, law No. 430 was enacted last year. This allows the Central Bank to hold an account for the management, servicing and reduction of public debt. The account will receive the proceeds of the country's privitization initiative over the next 20 years. "Under the law, the Ministry of Finance is authorized to entrust the Central Bank with the structuring of securitization operations [within the framework of the account]," explained Iyad Boustany, vice president at BEMO Securitiza -tion (BSEC). "Special purpose vehicles will be established by the ministry which will receive the proceeds of privitization operations on a true-sale basis, such transfer being expressly immune against any freeze order or set-off [risk]."

However, a long-awaited tobacco deal that has been talked about since last year is still encountering some problems under the regulations. According to market sources it will probably be some time before the deal materializes.

On another negative note, a new 5% tax was introduced. This is to be levied on interest, revenues and income related to all credit accounts opened with banks. The tax is imposed on interest, revenues and income gained on fiduciary accounts and asset-management accounts.

"This tax hits securitization transactions and impedes any transaction from reaching full fiscal transparency," explained sources at BSEC.

But despite the market's transitional stage at least one new structure has been tested in the market. A $13.1 million cross-border auto loan securitization deal was announced by Banque Audi, who acted as arranger, with Universal Finance Opportunities, Ltd. a Cayman Islands SPC, as issuer. It's a pro rata structure, explained one source familiar with the deal ,where the Class 1 notes pay 9.75% interest, and have a two-year maturity and the Class 2 notes pay 10.75% interest, and have a three-year maturity. However, it is unclear, added the source, whether the deal will be in breach of the Banque du Liban's current regulations that ban cross-border transactions.

"There has been increased interest in this sector because interest rates have fallen sharply and investors are looking for higher yield, available to them through the securitization market," said Boustany. "For example, in the recent auto loan deal the interest rate paid was 10%, and banks at this point are only paying 4%. These transactions also offer short maturity, and at the moment there really isn't any appetite for long-term paper."

Going forward, execution of these transactions should be facilitated by the awaited ABS law that is expected to feature reforms promoting smaller-sized transactions.

Also, historically, if an originator wanted to do a receivable transaction, the receivables are required to be listed one by one, and the originator is required to notify the obligors each time. Under the proposed new law, in order for the structure to be considered a true sale, the originator may submit a list where all obligors are grouped and all that is required is their one-time signature that is then handed over to SPV.

Gulf Cooperation Council region

Outside of Lebanon in the Gulf Cooperation Council (GCC) region - which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates - things have remained relatively quiet this year. But Boustany at BSEC maintains that the augmenting appetite among Islamic Banking investors for securitization structures might pave the way for new deals this year.

Moody's Investors Service last year published a special structured finance report on Saudi Arabia. The report focused on the legal environment shared throughout the GCC, which sets no legal precedent for structured finance under Islamic Banking regulations. Islamic banking is based on Shariaa principles (order of Islam), which forbid the receipt and payment of interest and is termed as partnership/profit and loss-sharing banking.

So far there has only been one other global bond issue structured under this construct, the Malaysian Global Sukuk. Lebanese transactions are structured under conventional laws, explained Boustany, but impending changes to banking laws will accommodate Islamic banking structures in the future.

BSEC, said Boustany, has been solicited by more than one company to structure a cross-border transaction and on the investor front, there is a growing appetite for Islamic structured-type deals. "It is known that about 35% of bank deposits in the GCC are non-interest bearing," he explained. "Eight out of 10 investors allocate a substantial part of their portfolio to Islamic paper, and 5 out of 10 invest exclusively in Islamic paper, and liquidity is at its peak in GCC countries. We think the GCC will be the market to tap during the next five years especially with short-term instruments like credit cards and leasing deals."

On the real estate front, for example, a growing demand for home ownership signals the potential market for mortgages. According to a recent BSEC report, Saudi Arabia is currently experiencing the world's highest population growth rate. It paves the need for a "well regulated conventional and Islamic mortgage industry that can be an engine of economic development and growth for the region."

Furthermore, the Saudi Arabian market also seems keen to securitize lease receivables. A market feature specific to the Saudi market allows leasing companies to borrow money within their shareholder structure, but banks are no longer willing to lend money to their subsidiaries, and leasing companies are, to a large extent, partial or total subsidiaries of banks. But this business has now grown to substantial volumes.

"The Saudi market is booming. There has been a phenomenal growth over the last five years and all the lessors have reached capacity," said Boustany. "They can't underwrite new loans and bankers are reluctant to extend them loans. That's why they are looking for securitization and are now turning to ABS for financing and to restructure their balance sheets. Leasing lends itself to Islamic structures. It's an opportunity since there are the right investors and the right instruments."

Although the opportunities seem ripe, Islamic banking has been a much-talked about sector over the past years and some market players aren't so quick to share the BSEC enthusiasm. "Aside from the aforementioned Global Bond deal, there has been little else in the works," said one source at Moody's. "We haven't really been seeing proposals and it's complicated to assess why that has been."

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