Africa Bond Markets Conference Nairobi November 2011

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Quentin Robinson
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1 Africa Bond Markets Conference Nairobi November 2011 Session: Housing & Securitisation How Housing Finance Organisations Can Access Bond Markets Global Perspective & Application to Africa Kerry Adby The International Securities Consultancy Ltd 1

Access Bond Markets Global Perspective & Application to Africa

2 What are the Objectives & Options for Housing Finance Organisations? Is Housing Finance Organisation (HFO) constructing to Sell, Tenant Purchase Retain some or all to rent? Some Options include 1. Issue of corporate bond instead of borrowing from bank possible longer maturity, possible lower cost 2. Issue a covered bond 3. Securitise the presales, tenant purchase agreements, mortgages 4. Consider combining one of the above with a REIT to release equity 5. Establish joint venture or D-REIT with other investors to develop & issue bond secured against property & future sales - bond may contain a profit share element 6. Issue an Islamic sukuk bond in a profit share arrangement 2

Issue of corporate bond instead of borrowing from bank possible longer maturity, possible lower cost 2. Issue a covered bond 3.

3 The Differences Corporate Bond Corporate bond as part of it s financing mix instead of being totally dependent on deposits or borrowing from bank or raising more equity to fund growth Bond Secured or unsecured Housing Finance Company is liable & full recourse to all its assets Why:- use bond markets? Possible longer maturity, better matching of HFOs assets & liabilities Tap new source of funds from investors with no exposure to housing sector no exposure to risk of that sector - no single risk limit Possible lower cost Risk management - able to lock in interest rate exposure for longer period 5% rise in cost of funds can have substantial impact on business viability 3

Possible longer maturity, better matching of HFOs assets & liabilities Tap new source of funds from investors with no exposure to housing sector no exposure to risk of

4 The Differences Covered Bonds May also be called Mortgage Bonds Widely used in Europe 2010 EURO 2.5tr New to US, Australia (used synthetic securitisations) Similar structure used in Sri Lanka where ABS not available yet (Mortgage trusts) Simple direct structure below Alternative is via an SPV Bank of other Originator of mortgages segregates a pool of mortgages & pledges to Bondholders Bondholders principal risk is to bind Issuer if default than it ahs the pledged assets to have recourse to CREDIT OF ISSUER IS CRITICAL Could also apply to rents due from tenant leases or tenant purchase 4

direct structure below Alternative is via an SPV Bank of other Originator of mortgages segregates a pool of mortgages & pledges to Bondholders

5 Differences: - Mortgaged Backed Securities & Asset Backed Securities Pool of mortgages is sold to a Special Purpose Vehicle SPV now owns the mortgages Seller may provide limited credit support for expected losses BUT no additional claim on Seller if mortgages default CREDIT of Mortgages is CRITICAL in MBS NOT Originator Need not be Mortgages could be presale agreements rent from tenants Trustee for MBS Servicer 5

expected losses BUT no additional claim on Seller if mortgages default CREDIT of Mortgages is CRITICAL

6 Comparison Covered (Mortgage Bonds) & MBS 6

7 Dispelling the Myths of Securitisation Securitisation is not a monster We don t stop banks lending because some NPLs Problem was US sub-prime mortgages banks rating agencies investors regulators failed CDOs where assets were subprime mortgages CDS written on CDOs & others related to subprime In US in extreme recession prime MBS OK Developed & Emerging Markets - preforming & have for 20+yrs Other Asset Banked Securities (ABS) performing Securitisation a very valuable mechanism Reduced significantly cost of housing finance worldwide Resulted in millions accessing housing Lead to major mobilisation of additional housing finance Reduced systemic risk on banking sector Allowed new entrants to housing finance market & new finance products ESMID project produced MBS & ABS Framework KENYA has new draft Regulations awaiting passage BUT Central Bank agreement & amendment of Tax laws (neutrality only) still necessary UGANDA considering draft regulations 7

Other Asset Banked Securities (ABS) performing Securitisation a very valuable mechanism Reduced significantly cost of housing finance worldwide Resulted in millions accessing housing Lead to major

8 So How Might HFO s Access Bond Markets? 1. Direct issues of bonds possibly easiest entry point familiarise market with HFO & its assets Bond issues require greater & more specific disclosure than bank loans Greater transparency leads to greater confidence in assets & the HFO s underwriting & management 2. Consider use of covered bonds as 2 nd step 3. Push for Introduction of securitisation regulations Establishment of secondary mortgage market entity 4. Consider use of REITs in combination if suits HFOs business mix & model 8

specific disclosure than bank loans Greater transparency leads to greater confidence in assets & the HFO s underwriting & management

9 For Securitisation to be Effective Regulations alone not enough - NEEDS Tax changes NOT to provide incentives but to achieve neutrality with HFO s borrowing from bank Insurance & pension fund regulators including investment category & reserving requirements (Kenya manage Sh600bn) little exposure to housing For regulated parties Central Bank to introduce guidelines No Central Bank in world is prohibiting Consider establishment of Secondary Mortgage Liquidity provider e.g. Cagamas Malaysia 20yr successful history played major role in developing housing finance, bond market & introduction of MBS, Successful examples in Hong Kong, Australia, etc, etc 9

10 Consider Using Real Estate Investment Trusts in combination with Bonds MBS securitises the debt of housing HFO s borrowings or mortgages or tenant purchase or leases it has provided to customers REITs securitise the equity of housing via a special Collective Investment Scheme Examples 1. HFO owns land it is developing for houses to Sell or rent or tenant purchase 2. Has a pool of houses already tenanted or with tenant purchase arrangements in place A REIT allows it to transfer the properties into REIT & retain % ownership manage the REIT & share in returns This frees up capital for the HFO to invest in new finance or projects 10

HFO owns land it is developing for houses to Sell or rent or tenant purchase 2.

11 Kenya currently considering REIT Regulations Adapted Specifically for Housing Considering 2 types of Regulations Traditional Income REITS I-REITs Development RETIs D-REITs D-REITs can invest in developments building and construction with housing specifically in mind I-REITs can acquire income producing real estate e.g. houses already tenanted D-REITs can convert to I-REITs & List on NSE Objective is to Mobilise additional funding for housing & development Allow HFO s to recycle capital invested in existing housing 11

specifically in mind I-REITs can acquire income producing

12 What Do You THINK? 12

Real Estate Investment Trusts (REITs) The International Standard for Property Investment

Real Estate Investment Trusts (REITs) The International Standard for Property Investment What is a Real Estate Investment Trust (REIT)? A REIT is a listed company, used to hold rental investment properties.