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

kadby@attglobal.net The International Securities Consultancy Ltd

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 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
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 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
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 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

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 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

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Comparison – Covered (Mortgage
Bonds) & MBS

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 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
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 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 2nd 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
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 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
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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
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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
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What Do You THINK?

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