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KSA MBS (I) A CASE STUDY by S STOCKLEY

March 2007 Dubai. KSA MBS (I) A CASE STUDY by S STOCKLEY. KSA residential real estate is witnessing unprecedented growth and home finance likewise is growing rapidly. SR 19 Billion ($5 Billion) in estimated real estate finance supplied in 2004

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KSA MBS (I) A CASE STUDY by S STOCKLEY

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  1. March 2007 Dubai KSA MBS (I) A CASE STUDY by S STOCKLEY

  2. KSA residential real estate is witnessing unprecedented growth and home finance likewise is growing rapidly • SR 19 Billion ($5 Billion) in estimated real estate finance supplied in 2004 • 65% of the market is serviced by commercial banks, which offer the cheapest financing but with restrictive eligibility criteria • 8% of the market is serviced by specialized installment companies that on average charge 2% higher than banks • With a 1.8% mortgage-GDP ration the KSA market has large growth prospects: • 37% of the population lives in rental properties representing a large current demand for housing finance • Only 10% of new residential properties are currently financed through home loans.

  3. Mortgage Finance as a Percentage of GDP (Developed Countries)

  4. Mortgage Finance as a Percentage of GDP (Developed Countries)

  5. Saudi Mortgage Finance Market • Constraints: • Lack of specialist mortgage finance firms. • Lack of liquidity into the mortgage finance market. • Lack of consumer education in mortgage finance • Lack of commitment to the industry by majority of players. • Lack of regulated legal system. • Lack of developed swap market

  6. KIC has been a pioneer in the KSA mortgage market by offering the first 20 year home mortgage product • KIC started operations in 2000 is the largest specialized housing finance company in KSA with a total market share of 2.28% • Steadily built a sizeable portfolio with a strong performance track record • Mortgage book of over $450 million and default rates of less than 0.5% • KIC is a market leader in product features and client service • Only specialized housing finance company to offer 20-year mortgages • Only housing finance company offering pricing competitive to banks

  7. KIC applies conservative lending standards and closely monitors arrears Credit Criteria of the RRBS Pool: • Weighted Average LTV 78.99% • Weighted Average PTI 29.29% • Lending restricted to major cities • Legal ownership of asset with financier until loan is paid off easing foreclosure • Centralized credit approval process Arrears Management • 55% of accounts paid by direct debit and post-dated checks • Personal guarantors of client are financially liable for client • Only 1 case of foreclosure in 4 years of operation, and successfully executed • Arrears have never exceeded 0.22% of the portfolio and were 0.10% on December 30, 2004

  8. KIC is a leading financier for its sister company DAR AL-ARKAN (DAAR) one of the large developers of residential real estate in KSA • DAAR is geared up to develop 65,000 residential units in KSA in the five years from 2005 through 2009 • DAAR has leading market share in residential real estate development in KSA, with Kingdom-wide geographical expansion • DAAR is the first residential real estate firm in the KSA to obtain the ISO 9001 certification for applying quality management systems that ensure products compliance to international quality standards • DAAR is a highly profitable and well capitalized business 2004 financial year performance • Total assets SR 6 billion • 2004 financial year Gross Margin 48.76 percent • ROE 33.92 percent • Net profit SR 1.09 billion ($290 million) • Leverage 0.11

  9. Future Developments • KIC currently being re-structured as Saudi Arabia Homeloans (SAHL) and recapitalised at $550m making it largest specialised real estate finace provide in the Middle East. • Newshareholders in SAHL will include : • Arab National Bank (40%) • International Finance Corporation (5%) • Daar Al Alarkan (15%) • KIC (40%) • SAHL will be licensed by both Ministry of Commerce (MOCI) and Saudi Arabian Monetary Authority (SAMA). • SAHL will shortly execute a second securitisation transaction ($400m) as part of the KSA MBS series (KSA MBS II)

  10. All KIC lending is Sharia compliant • All major/structural maintenance responsibility of the Lessor • All minor maintenance due to daily wear and tear responsibility of the Lessee • Lessor responsible to obtain and maintain all required insurance policies • All excess proceeds from total/partial loss occurrences for the benefit of the Lessor • All excess proceeds from condemnation occurrences for the benefit of the Lessor • Ownership of the asset must rest with the Lessor • All late payment charges levied against the Lessee must only be for covering the Lessor's administrative costs relating to recovering delinquent payments • Prepayment penalties must be compensation for a specific loss to the Lessor and not just levied for the purpose of penalizing the Lessee • Rental Payment Amount must be for a pre-agreed amount only to be amended on mutually accepted terms. • Any taxes levied against the asset are the responsibility of the Lessor

  11. Sharia Compliant Ijara or Istisna Lease Structure 2. Title and deed Seller Financier (Lessor) 1. Purchase price 3. Ijara finance Lease or Istisna Agreement 4. (Mortgage) 5. Rental payments 6. Final payment 7. Title and deed Buyer (Lessee)

  12. UIB Sharia Board approved Tawarruq Facility structure to enable the International Finance Corporation’s participation as guarantor

  13. KSA MBS I International Sukuk Company Bond Structure

  14. Terms of Issue

  15. Reputable International Administrators

  16. Distinguishing Featuresof Transaction • Pilot project but now concept proved part of a series of ongoing issuance programme • Allows international investors access to exposure in KSA residential market for the first time • True securitisation : • True sale • Off balance sheet treatment • No recourse to originator • Solid legal opinions from reputable law firms • Demonstrates ability to merge traditional Islamic structure with best of practice in respect of Western securitisation technology

  17. Lessons Learned • Size does count • Quality of data • Systems and reporting ability • Time, money, personnel • Timing – market conditions • Ratings – involve the agencies early • Pricing • “Build it and they will come”

  18. The Way Forward • In the “sweet spot” • Fundamentals are right! • Solid economic framework • Strong investor demand • Rating agencies and arrangers present in the market • Reduced credit enhancement and over-collaterilisation • Increased size and frequency of issuances (all asset classes) and reduced spreads (c.f. SA capital markets)

  19. SA Capital Markets Issuance Levels 2000 - 2006 Courtesy of

  20. SA Capital Markets Spread Compression2000 - 2006 Courtesy of

  21. Thank youSimon Stockley • Mobile :+27 83 2760068 • Fax : +27 866 728133

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