For some time now the securitization market has looked hopefully to the region governed by the Gulf Cooperation Council (GCC) - which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates - but the absence of securitization regulation here has stunted potential growth.

Despite these challenges, sources at BSEC-BEMO Securitization, the investment-banking subsidiary of Lebanon's Banque Europeenne pour le Moyen Orient (BEMO), remain committed to establishing securitization as a useful tool and recognize the growing opportunities emerging in this region. Earlier this month BSEC-BEMO led Saudi Arabia's first rental fleet, auto lease-backed Sukuk (an Islamic bond).

"Our focus has been to build a securitization business focused on the region, but, because there is no true capital markets established, this presents a challenge as well as an opportunity, considering the number of corporates looking for alternative funding sources," said a source at the BSEC. Its latest venture, Caravan I, is an SR103 (US$27 million) securitization for Saudi Arabia's HANCO Rent-a-Car. A pool of vehicles backs the transaction, with cash flow coming from the lease agreements with HANCO. The deal is structured for a three-year tenor, and offers Islamic investors a 6% return. Caravan pays monthly.

Caravan was built with a number of structural and credit enhancement features: a two-tiered, two-jurisdiction structure with 15.39% overcollateralization; a 4.25% equity tranche and 8.77% cash reserves, according to sources familiar with the transaction. The structure also includes embedded early warning triggers mitigating its performance deterioration risk.

Structuring under Saudi law

Under Saudi law, vehicle lease activity is restricted to Saudi Nationals or Saudi-owned companies; hence, in the case of Caravan I, the issuer - a Jersey-based SPV - cannot own the underlying assets. A Saudi-owned Special Purpose Company (SPC) was set up in Saudi Arabia in order to purchase the assets from the originator (HANCO), and another entity, Caravan I, was established in Jersey to issue the Sukuk.

Bankers at BSEC also contended with the absence of trust laws in the Kingdom, as well as with the region's Shariaa-based principles (order of Islam). Moody's Investors Service published a special structured finance report on Saudi Arabia focusing on the legal environment shared throughout the GCC. There is no legal precedent for structured finance under Islamic banking regulations. Under Shariaa principles, the receipt and payment of interest is forbidden. Transactors elected to term the transaction as partnership/profit and loss-sharing banking.

The transfer of cash between SPC and SPV is governed by a Shariaa-compliant funding agreement similar to a Murabaha (this is an Islamic concept that involves buying goods for a client and selling them at a profit, avoiding payment of interest).

"The instrument used under the Caravan structure can be compared to a loan agreement but with specific features such as (i) risks and return sharing, (ii) ring fencing and (iii) flow through," a spokesman at BSEC said.

More deals to come?

In past years, the Saudi market has shown potential for lease receivable transactions because of the need for funding. A feature specific to the Saudi market allows leasing companies to borrow money within their shareholder structure, but banks today are less willing to lend money to their subsidiaries, and leasing companies are, to a large extent, partial or total subsidiaries of banks. Lessors at full capacity are looking at securitizations to finance and restructure balance sheets.

While the potential for inventory deals is limited by the rather small size of the market, the Caravan structure has sparked reasonable interest from potential issuers, as the rent-a-car market is strong in the region. "Although this structure cannot be applied to other assets, it could be transferred to other inventory fleets in the region," the source at BSEC said. "We've not seen many inventory deals in the past and thought it's a smaller operation when compared to the financial lease sector in Saudi Arabia. These assets have a liquid secondary market."

"We thought it was important to establish this type of securitization and, in the event that cars would have to be sold, it would be easy to execute," added the source.

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