Sorouh pays premium for securitisation

22 August 2008

Local banks take up $1.1bn real estate debt as international banks remain wary of syndication risks.

The UAE real estate firm Sorouh is closing a AED4.16bn ($1.1bn) Islamic securitisation at margins starting at over 200 basis points over the interbank lending rate.

The lending charge is far higher than other recent deals and indicates that banks are still cautious about participating in asset-backed finance deals.

A source close to the deal tells MEED Sorouh paid a “structural premium” for the debt because it sold most of it on to local investors.

The deal was mainly placed with regional banks, he says, after the demand among international investors proved relatively weak. The smaller pool of available investors meant Sorouh paid a higher price.

“It is a shame that the deal mainly went to local banks because it adds further exposure to Dubai real estate in the local banking market,” says one local banker. “It would be more helpful if the deal had been sold to investors internationally to free up some local capital.”

Many banks are wary of securitisation deals, which have been partly blamed for the global credit crisis. In the past, banks repackaged real estate debt into asset-backed fixed income products, which were sold on to other investors. However, a lack of clarity about what was contained in these instruments led to problems assessing their value.

The Sorouh deal is structured as three tranches, with the two lowest priced tranches receiving investment grade credit ratings from ratings agencies Moody’s Investors Service and Standard & Poor’s.

One tranche priced at 200 basis points over the Emirates interbank offered rate (eibor) has been rated at Aa3. The second, at 250 basis points over eibor, was rated at A3. The third tranche, rated Baa3 by the agencies, was priced at 350 basis points over eibor.

Although the Sorouh deal was priced in line with the initial guidance given by the arranging banks, it is well above a recent securitisation deal by Dubai Water and Electricity Authority (Dewa).

That was sold to investors at a margin of 25 basis points over the London interbank offered rate earlier this year (MEED 23:05:08).

Securitisation deals generally offer a lower cost of borrowing than other types of debt, as they give lenders recourse to specific assets held by the borrower. In the case of the Sorouh deal, it involves the future revenues from its Shams and Saraya developments in Abu Dhabi.

Bankers say that Sorouh should be able to lower the margins it pays on future securitisation issues as regional investors become more sophisticated. “It may be that the real cost benefits of securitisation do not start to appear until after a few more issues have been done and more investors understand the product,” says one banker.

Sorouh could not be reached for comment.

The securitisation deal was arranged by Citigroup, First Gulf Bank, Abu Dhabi Commercial Bank, National Bank of Abu Dhabi and Noor Islamic Bank.

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