Securitisation driving innovation

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Investment in infrastructure could be used as a base on which to create structured instruments.

Securitisers are now looking at asset classes like private equity and project finance.

Worldwide securitisation volume declined to US$19.2 billion in February 2008, according to Thomson Financial, the lowest monthly volume since January 2006, but Middle East securitisation experts are still eager to launch new transactions and models.

Maan Kantar, head of structured products and product development division, Gulf Investment Corporation (GIC), says that the sector is at a critical point, despite current market troubles. "What we're seeing in the securitisation market now is major," he says.

"It's an event that happens once every 10 to 15 years. The whole business is changing."

"Securitisation is one of the most efficient tools to reduce risk: let's say an investment of 100 units is too risky: by securitising it and creating several tranches, you can create a very low risk part for 50 and a very high risk part for 50, so you can cater to the investors' demands and also change the profile of the investment you held initially."

GIC has been looking at securitising private equity and project finance, both of which are usually extremely long term instruments and traditionally only bought by a limited number of participants.

Traditional private equity investors, for example, do not receive any regular returns until the fund has exited its positions.

"Securitising can create a fund or pool of assets, from which you can extract regular payments, and even a certain level of security," says Kantar, "which is not present in the traditional market. Basically, as long as you can create a diverse pool, of a stable and reliable asset class, and slice it, you can create different levels of return, different levels of security to cater for different investors ranging from the equity type to the AAA type."

In a private equity securitisation, to create liquidity, it may be necessary to hold onto some reserve capital in order to make the first repayments to investors before the fund has acquired income-generating businesses or generated income by divesting them.

"There are two types of securitisation: you have amortising securitisations where investors are paid back as the initial assets are amortising, but you also have securitisations that are reloaded all the time, where new assets keep on replenishing the pool," Kantar says.

For trade receivables, which typically have a 90-day duration, a securitisation might extend the investment into a three-year term. As trade receivables are amortised, they would then be replaced by new ones, subject to predefined conditions and requirements. This will attract investors who like duration.

With project finance transactions, which typically last 10 years or more, securitisations will tend to make the investment shorter. This change will attract a new category of investors.

As structures are applied to asset classes and instruments that have not commonly been securitised, new paper is being created that is uncorrelated to many other assets and markets. This could be particularly attractive to foreign investors eyeing the Middle East.

Kantar says that GIC has been in contact with European investors, who are keen to buy into structured finance transactions in the Middle East, and specifically the Gulf, whether or not they are listed on European exchanges. "As long as the structure is solid and transparent and they can understand exactly what the risks are, it is very likely that the Europeans will invest because there is a need for geographicaly diversified investments," he says.

There is also no reason, he says, why collateralised debt obligations (CDOs), which have received so much bad press following the sub-prime meltdown, could not be originated in the Middle East.

"At the moment there is a lot of negative news about CDOs, but the CDO itself is not the problem, it's what you put in it," says Kantar.

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