Dubai Electricity & Water Authority (Dewa) is close to finalising a $1bn securitisation deal, in the first sign that the region may be avoiding the global downturn in asset-backed finance.
The deal follows a similar $1bn issue Dewa completed in the summer of 2007, which was expected to kick-start interest in using real estate assets or future cash flows as collateral for debt. Dewa’s deals involve ring-fencing future revenues from utility bills as security against its bonds.
Shortly after the first deal’s completion, however, the US sub-prime mortgage crisis hit. Securitisation was at the heart of the crisis, putting the brakes on other firms’ plans to issue such debt.
Despite the slump in financial activity in most major global markets, Dewa is launching a second, similarly structured $1bn financing deal. Sources close to the latest deal say appetite among investors has been strong.
The deal is one of a series of issues being considered. An Islamically structured securitisation of a similar size is expected to follow the Dewa deal. Khalid Howladar, vice-president of credit ratings agency Moody’s Investors Service, says there are several other potential issuers in the region.
“About three or four companies in mortgage finance in the UAE and Saudi Arabia have approached us about getting private ratings of their assets, with a view to securitising them in the future,” says Howladar.
In 2007, several international banks including Calyon, Standard Chartered Bank, HSBC and Barclays Capital established securitisation teams in the region in anticipation of rising deal flow. “We have a team out here who have yet to do a deal, but we think there is definitely a future for this product in the region,” says the Dubai-based head of one securitisation team.
He adds that while the sub-prime crisis has slowed progress on developing a Middle East securitisation market, he expects it to re-emerge in three to six months.
However, questions remain over how much the regional securitisation market will grow.
Debashis Dey, a partner at UK-based law firm Clifford Chance, who has been working with clients interested in securitisation deals for several years, says the Middle East will be able to generate no more than one or two deals a year.
“The Middle East securitisation market is definitely insulated from the rest of the world because if you look at the US and Europe, they are not doing any deals,” he says. “But there won’t be 20 deals a year coming out of the Middle East. One or two deals a year for the next few years is more realistic. I know banks are doing a lot of pitching to clients, but there are not many mandates being awarded.”
The sub-prime crisis led many international investors to shun securitised debt, while Middle East investors are less keen on
the asset class as it tends to offer lower yields than other investment oppor-tunities in the region, such as sukuk (Islamic bonds) or real estate.