Fitch Ratings downgraded Tamweel Residential ABS CI (1) Ltd.'s class A and B notes.
The Class A notes due July 2037 were downgraded to 'A' from 'AA' and the outlook revised to Negative. The Class B notes due July 2037 were downgraded to 'BBB' from 'BBB+’, outlook revised to Negative.
The Class C notes due July 2037 were affirmed at 'BB-' but the outlook was revised to Negative from Stable.
Fitch said that the rating action is driven by the deterioration of credit fundamentals within the Emirate of Dubai which, in the agency's opinion, increases the uncertainty regarding the transaction's performance.
Tamweel Residential ABS CI (1) Ltd. is a securitization of residential property lease receivables due from mainly non-Dubai nationals working in the Emirate. It’s considered to be the region's first cross-border RMBS.
The deal, which is Shariah-compliant, is backed by a portfolio of "Ijara" contracts (lease-to-buy), denominated in United Emirates dirhams and originated by Tamweel. Under these contracts, a constructed property is acquired by Tamweel and subsequently handed over as a long-term lease to the lessee for an agreed rent and specified period. Morgan Stanley hedges the deal's currency risk, as the transaction is denominated in dollars.
All the properties in the deal are located in Dubai.
The notes funding the portfolio have already amortized to 32% of their initial balance and credit enhancement has increased accordingly to 42.7% for the class A notes, 29.1% for the class B notes and 21.0% for the class C notes.
Fitch said that all tranches of notes are able to withstand a high degree of losses. The transaction has not reported any defaults to date. Fitch believes this is explained by the high seasoning of the leases that were originated between 2004 and 2006, and the increase in property values up to early 2007.
However, Fitch is concerned that a rapid and severe deterioration of the portfolio's credit quality could occur if fundamentals in the region continue to deteriorate. Risk factors include a continued drop in property prices (down by an estimated 20% since January 2007); lack of liquidity in the property market which would make it more difficult to sell properties, and the high exposure to expatriates who may leave Dubai at short notice if economic conditions deteriorate further.
If LTVs were to increase, Fitch would expect defaults to rise, putting pressure on court enforcement procedures which are largely untested in Dubai.
Moody's Investors Service rated the $177.5 million A tranche 'Aa2', the $15.3 million B tranche 'Baa1' and the $9.9 million C tranche 'Ba3'.