$14trn business in US
No Saudi regulation yet
UAE growth expected
Asset securitisation, a $14 trillion business in the United States, seems to be finally gaining ground in the Gulf.
Last week the UAE lender Deem Finance sealed a $400 million asset securitisation deal with JP Morgan. Emirates NBD of Dubai and Rasmal Ventures in Qatar have also co-invested $7.6 million in the Turkish startup TeamSec, whose technology makes it potentially less costly and quicker for companies to securitise their assets.
Securitising assets frees up capital for so-called originators, usually banks and other financial services companies, enabling them to expand more rapidly and support the region’s economic diversification efforts, while also offering regional institutional and wealthy investors another asset to trade.
However securitisation is still “in its infancy” in the Gulf, said Chris Taylor, CEO of Deem Finance, with just “a handful” of deals completed so far.
Any company with regular receivables, such as loans, leases or payments owed, can securitise their assets. To do so the company establishes a special purpose vehicle (SPV), which legally takes ownership of the assets.
The company then sells securities, often in the form of notes or bonds, which represent a claim on the cash flows generated by the SPV assets.
Immediate payment
As a result, the company receives an immediate payment, typically at a discount to the receivables’ face value. Investors, in turn, earn returns as the underlying receivables are paid, with the SPV distributing these payments to them.
UAE and Saudi market regulators see asset securitisation as an important step forward, according to Taylor. Their governments’ ambitions to expand their economies outstrips the ability of local banks to absorb such growth into their capital and balance sheets, he said.
In mid-2023, the UAE Securities and Commodities Authority issued asset securitisation regulations. These clarified that securitisation was the “true sale” of the securitised assets, not a financing transaction, according to a note by the law firm Baker McKenzie in Dubai.
Another important specification is that securitised assets are separate from the originator and so would be unaffected were the originator to go bankrupt or insolvent.
These rules give prospective buyers much greater confidence to invest, said Mazen Boustany, a partner at Baker McKenzie.
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However, Saudi Arabia still lacks regulations on securitisation, the law firm White & Case, which has an office in the Dubai International Finance Centre, has written in a note, although the Riyadh-based buy-now-pay-later company Tamara raised $400 million in debt last year that used some of the company’s receivables as collateral.
The growing presence of international hedge funds in the Abu Dhabi and Dubai financial free zones augurs well for asset securitisation, said Taylor.
“Those guys have got firepower and they’re going to want to deploy into assets, so it’s unimaginable to me that this won’t now take off,” he said.
The assets that Deem Finance sold to JP Morgan consisted of approximately two thirds consumer debt – credit cards and loans – and one third loans to small and medium-sized businesses. JP Morgan may re-sell the securitised assets.
“What we’re keen to do is to bring some of this debt into the local market,” Taylor said.
The securitisation does not change the terms and conditions for the original borrowers, with Deem managing its customers as before. Importantly, Deem retains ownership of a portion of each receivable.
“We’re not getting rid of the risk,” Taylor said.
Turkish startup TeamSec’s technology helps originators select assets to securitise via advanced credit and data analysis. It has completed around 100 securitisation issuances since launching operations 18 months ago.
Combined, these involved assets worth more than $1 billion. Its priority markets are Saudi Arabia and the UAE.
The platform reduces the time required for a company to complete its first securitisation to as little as two months, from up to nine months previously, according to TeamSec’s founder and CEO, Esad Erkam Köroğlu.
Subsequent securitisations can then take as little as a week, versus, more normally, as long as three months.
TeamSec will facilitate the first mortgage securitisation in Saudi Arabia this year as well as the UAE’s first invoice securitisation, Köroğlu said.
Securitisation enables financial or non-financial corporations “to run their balance sheet in a more capital-optimised manner,” he said.
