Middle East banks have stayed relatively free from sub-prime write-offs as the credit crunch has rolled out around the world. But the financial crisis is making its presence felt in holding up securitization in the region with the widening of spreads leading to the postponement of corporate sukuks and mortgage-backed securities.
‘It is hard to tell when this log-jam will break,’ said David Mundell, Citi Vice President for Agency and Trust speaking on the margins of the ‘Securitization World’ conference in Dubai recently.
‘In one sense it shows just how strong the issuers are in this part of the world. They can just say securitization has become too expensive and wait for spreads to come down. They are clearly not desperate to obtain money at any price.’
However, the slowdown in securitization – with corporate sukuks or Islamic corporate bonds down by a half in the first quarter – has surprised some commentators. Last year sukuks in the UAE grew by 27 per cent to $11.1bn, and this year more substantial growth was expected.
This May Nakheel, the real estate arm of Dubai World, plans to raise up to $1 billion by selling two-year dirham-denominated benchmark sukuk floating-rate notes. Yet this issue is unlikely to be enough to restore growth in sukuks for 2008 after the shortfall in the first quarter.
Earlier this month an extraordinary general meeting of Tamweel shareholders approved the issuance of its delayed Dh5.1 billion ($1.39 billion) sukuk. This amount includes Dh1.1 billion of convertible sukuk and Dh4 billion of non-convertible sukuk, including Dh1.83 billion of non-convertible sukuk.
‘We do think many companies will go ahead with sukuk, and are doing their due diligence to be ready when the market clears,’ said Mundell. ‘At the moment there are issues being done, just less than before, and quite a few private ones with even just one other party involved.’
It is the same story for mortgage-backed securities, hardly the flavor of the month in financial circles after the crisis over sub-prime mortgage securities, but a very different proposition in the booming real estate markets of the Middle East. Here the pressure will surely build for these issues as end-users require mortgages to buy the large numbers of units coming up for completion.
‘Shariah compliance is of course the main difference in this market,’ said Mundell. ‘And we have an entirely separate Islamic treasury operation available at Citi for these transactions, something that Islamic scholars are likely to increasingly specify.’
However, it seems Islamic bonds and shariah-compliant mortgage-backed securities are suffering from the same global credit squeeze that is reducing the availability of mortgages in the UK and US at the moment.
‘The banks are having to put more of their capital aside to cover write-offs and that means they have less to lend with other products, and this is a vicious circle,’ explains Mundell. ‘Nobody can say how long this is likely to last or exactly what will be the solution but it will be gradually worked through over time.’
But this is clearly bad news for the investment bankers, lawyers and other professional advisers establishing expensive new operations in places like Dubai in anticipation of a tidal wave of securitization. It may still come, if global capital markets settle down, and the US presidential election this autumn is not followed by a further slump in investor confidence.
Or it may be that the Middle East will have to trim back some of its more ambitious development projects for a world in which securitization is more expensive and therefore less useful than in the recent past. Financial innovations do tend to come and go, while the availability of local liquidity suggests that domestic funding for projects is not about to dry up anytime soon.
Mortgage-backed securities, in particular, may have had their day. The disconnection between the seller of the loan and the mortgage holder is under attack because it has led to questionable selling practices in the US and a level of moral hazard not appreciated by many buyers of these securities.
Going back to the traditional mortgage model with depositors’ short-term cash being lent for long-term home purchases may be the way forward. And the Gulf’s local banking sector is well capitalized and has the branch network to handle an expansion of traditional mortgage products.
But anything that restricts the flow of funds to investment projects is bound to impact on the pace of development. On the other hand, there are those who counsel that the breathless pace of development in the region is already overheating local economies, and that cooling it a bit might be a good thing.