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SRC to issue second sukuk this year, as securitization added to agenda

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By Mariam Meskin, Tom Brown
19 Sep 2019

Saudi Real Estate Refinance Company (SRC), a provider of mortgage financing in Saudi Arabia, is planning to issue its second sukuk of the year and may carry out a securitization, chief executive Fabrice Susini told GlobalCapital.

“We are still planning to issue at least one more sukuk this year,” Susini told GlobalCapital at the Euromoney Saudi Arabia Conference in Riyadh on Thursday. 

The issuer, which is fully owned by the kingdom’s sovereign wealth fund, Public Investment Fund (PIF), is still conducting internal discussions to determine the size, tenor and currency of the sukuk, though Susini confirmed that the new deal would be larger and longer than the sukuk raised earlier this year. 

That issue was a Sr750m ($200m at time of signing) sukuk with multiple tenors raised in domestic markets in March. 

SRC announced an issuance programme in December 2018, which enables it to issue up to Sr11bn of local currency denominated sukuk. HSBC Saudi Arabia was the sole lead manager and bookrunner of that issue. 

Earlier this year, SRC also announced that all of its sukuk issuances would be guaranteed by the Ministry of Finance, a move that is expected to boost investor confidence about the young company.

However, it is not yet clear whether SRC’s new sukuk will be limited to domestic markets again, or whether it will look beyond its borders.

“We will of course do what is best for us — if we see it is too early to go to international markets now and we see that we need to create more awareness about our agreements with the Ministry of Finance, then it may be more reasonable to stay domestic. Or we may say that we have had many non-deal roadshows and meetings with international investors, and if we test responses from our advisory banks, then we may see it is time to bridge the gap and go international,” Susini added.

“As a refinancing company aimed at providing liquidity in the housing system, our golden rule is to get access to liquidity whatever the circumstances.”

Securitization in the future

Susini — the former head of global securitization at BNP Paribas — said that SRC is ready to begin the first stages of issuing a debut securitization, but that it will have to wait until sufficient volumes are available to issue structured mortgage-backed bonds.

“Securitization will come at a point where [we] have exhausted or reached some limits in terms of leverage, size of market, size of balance sheet, [etc],” said Susini. “It will become more critical later on when the market has grown.”

The SRC envisions a securitization coming in two or three years once the market has reached a sufficient size. It will look at third-party ratings and ensure transparent reporting standards are met.

“Combining the expected growth of the market, our history, the processes and education needed to undertake this, I think it will take us two or three years to begin securitization. That does not mean we would not have started the process before, in terms of obtaining ratings, looking at ratings of third parties, ensuring our reporting is transparent — looking after all the prerequisites.

“Will it be a fully-fledged securitization? That is one question,” said Susini. “We still have some work to do to see how we can combine securitization with sharia compliance. But we will at one point look at structured finance to alleviate the constraints we may face in the future in terms of leverage ratio.”

The SRC will also “look at pushing the implementation of covered bonds” for balance sheet financing as well as its hypothetical securitization.

Saudi Arabian investors have put money to work in auto ABS, in deals issued by Rasameel Structured Finance, but the country itself has since little issuance relative to other GCC countries, such as the United Arab Emirates.

“[There is] still a lot of education to be done within Saudi and vis-à-vis third parties that would be involved with securitization,” said Susini.

Saudi Arabia’s Kingdom Instalment Company came to the market twice in 2006 and 2007 with residential mortgage-backed deals, but issuance died down after the financial crisis. Recently, the country has been seeing issuance in more diverse asset classes.

The Kingdom saw its first non-asset backed securitization issued in July 2019 by electronics and home appliances company eXtra, which issued a Sr166m ($44.2m) risk transfer securitization, selling its receivables to Al-Rajhi Bank.

Although SRC indicated it is open to tapping international capital markets, syndicated lenders are far from receiving a piece of the debt-raising cake. 

“We may at one point decide it makes sense to have a syndicated facility, just like at one point we may look at securitization… But doing a syndicated loan internationally is much too early, even compared to the prospect of doing an international sukuk,” added Susini. “That is partly because the sukuk we issue will be most likely guaranteed by the Ministry of Finance, therefore the starting point and engagement with international investors will be much higher. To start going for international banks right now may be a bit more challenging.”

By Mariam Meskin, Tom Brown
19 Sep 2019