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| Summary of Project Information (SPI) |
| This Summary of Project Information is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only. |
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| Project number | 24112 |
| Project name | KSA MBS |
| Country | Saudi Arabia |
| Sector | Finance & Insurance |
| Department | Global Financial Markets Group |
| Company name | Kingdom Installment Company |
| Environmental category | C |
| Date SPI disclosed | October 31, 2005 |
| Projected board date | December 1, 2005 |
| Status | Pending Disbursement |
| Previous Events | Signed: March 20, 2006
Approved: March 17, 2006 |
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| Description of company and purpose of project |
The proposed project is a $30 million IFC investment in Kingdom Installment Company (KIC or the company) to support the company’s future housing finance program. IFC’s investment would be in the form of a credit enhancement of the mezzanine tranche of the mortgage backed securities (“MBS”) to be issued by KIC. The project will allow the company to grow its housing finance operations and establish a market based housing finance program.
IFC will also consider taking a small equity/quasi equity position in KIC. The rationale for the equity investment would to help KIC develop its business further along industry best practice lines and to eventually become a housing finance bank once the law establishing housing finance banks in Saudi Arabia has been enacted. Saudi Arabia currently does not have specialized body for regulating housing finance lenders and regulatory oversight is limited. Through its investment, IFC will help the company in its preparation and transition to becoming a non-bank housing finance institution IFC’s equity investment will be considered following due diligence and only if there is a robust role for IFC, and a potential for an upside can be established as well as appropriate exit mechanisms can be identified or negotiated with the sponsors. IFC will play a catalytic role in introducing the company to a potential technical partner (HDFC etc) in helping them convert into a housing finance bank.
Under the proposed securitization, KIC will issue MBS backed by a pool of Shariah-compliant housing finance contracts originated in the Kingdom of Saudi Arabia (KSA). The issue will represent the first Shariah-compliant MBS issued in Gulf Cooperation Council (GCC) countries. The MBS would allow the KIC to diversify its funding sources by tapping the regional capital markets and enhance its liquidity needed to originate additional housing finance contracts especially as the company launches a new growth phase of its housing finance operations. The project will also introduce a high quality new shariah compliant asset class to the regional markets.
KIC has engaged Unicorn Investment Bank (UIB) out of Bahrain as arranger/placement agent, Lovell’s (London), who has an extended legal practice in Islamic financing and securitization, as the lead counsel and White and Case (Saudi Arabia) as local counsel for the MBS. Also, KIC has mandated Ernst and Young (Saudi Arabia) to provide advice on the tax and other accounting implications of the transactions. Finally Bearing Point (US) has been contracted to complete the cash-flow model for the MBS. The transaction is expected to be rated by Capital Intelligence Limited out of Cyprus.
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| Project sponsor and major shareholders of project company |
Sponsors:
The sponsor of the project is KIC, the largest private finance company to support housing finance in Saudi Arabia. KIC was established as a strategic unit of Al Arkan Real Estate Development Company which is the largest developer of housing units in the Kingdom of Saudi Arabia. Established in 2000, it commenced operations in Riyadh, as a limited liability company, in response to the rapid growth in the housing finance market and the significant change in the balance of supply and demand for real estate finance services. KIC was the first to offer 20 year mortgage loans in the Saudi Arabian market with a focus on the middle income segment of the market.
KIC’s main activity is to provide housing finance to individuals seeking to purchase a home or a developed land parcel. KIC achieves this by purchasing real estate within KSA from property developers and reselling to consumers on a Shariah-compliant installment basis. In addition to housing finance, KIC also engages in wholesale trading of automobiles, office fixtures and fittings, and electronic devices.
Ownership and Management:
KIC’s shareholding structure is the following:
Al Arkan Construction Limited Co. 34.8%
Yousef Bin Abdullah Al Shelash 14.7%
Majed A. Rehman A. Aziz Al Gassim 12.4%
Khalid Bin Abdullah Al Shelash 10.4%
Tariq Bin Mohammad Ali Al Jarallah 10.0%
Hathloul Bin Saleh Al Hathloul 8.9%
Majed Roumi Soliman Al Roumi 5.0%
Abdul Aziz Al Shelash 3.4%
Abdul Karim Bin Hamad Al Babtain 0.4%
100.0%
Sheikh Yousef Al Shelash is the founding member of the company who conceptualized and initiated the real estate business operations. All shareholders have a sound business experience mostly in the real estate area. Local authorities have also confirmed to IFC regional staff that the shareholders are respectable individuals, always having had honored their responsibilities. |
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| Total project cost and proposed IFC investment |
| Up to $5 million in equity in KIC and up to $25 million in the form of partial credit guarantee or purchase of the mezzanine tranche to support the placement of one or more of MBS issuances by KIC for an amount of up to $200 million |
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| Location of project and description of site |
| Riyadh, Kingdom of Saudi Arabia. |
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| Project Development Impact and IFC's Role |
This project will have a high development impact by:
Increasing Access to Housing Finance:
In addition to providing needed long-term financial support, the project will contribute to the country’s broader economic development by encouraging housing finance, which is a proven driver of economic growth. In general terms, the project is expected to support IFC’s strategy in the development of the housing finance market in Saudi Arabia which includes another project under consideration (SABB). More directly, the project would enable IFC to work with KIC, a leader in the housing finance market working on Shariah-compliant financing structures, to foster increased access to housing finance for the middle income segment of the population.
Fostering Regional and Local Capital Market Development:
The project will contribute to the development of the local capital markets by creating a new type of shariah compliant instrument which, if successful, will help foster this new asset class.
Replicability of Innovative Structure:
The capacity to issue a Shariah-compliant MBS can have a significant catalytic effect for supporting the development of new instruments that could be replicated in other countries which practice Islamic housing finance.
The development indicators to be tracked are:
- The successful placements of MBS by KIC.
- Replication by other institutions.
- Increase in the number of housing loans originated by KIC.
- IFC Role:
Given the incipient level of development of the housing market, the IFC sees support for housing finance projects, along with a planned housing finance technical assistance program that the IFC is working on in conjunction with the World Bank at the request of the KSA, as part of an emerging housing finance strategy for Saudi Arabia. Initially, the objective is to secure a more extensive understanding of the market situation, work on innovative structures with financial entities committed to the sector, identify the constraints to overall market development, and support the establishment of a more organized primary market by streamlining the type of direct funding it provides, particularly to extend the tenor for housing finance. The development of secondary mortgage market will be key to fostering the development of a vibrant housing finance market.
Given the similarity in the level of development the housing finance market in Saudi Arabia and its neighboring countries, it is also hoped that the IFC’s involvement in the sector could also create replicable structures to expedite the development of the housing markets in the neighboring markets and beyond.
Furthermore, IFC would actively bring its experience from structuring MBS’s in other parts of the world to this specific region. Finally, IFC will assist KIC to adopt international best practices in its housing finance business thereby preparing the Company to become a full fledged housing finance institution once the regulatory framework that is being developed is in place. |
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| Environmental and social issues - Category C |
This is a category C project according to IFC's environmental and social review procedure. There will be minimal environmental and social impacts associated with this project. Therefore, no further environmental or social analysis is required.
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| To contact the project company, please write to: |
Mr. Tahir M. Naseem
Director, Structured Finance
Manama
Kingdom of Bahrain
Telephone Number
+973 175 66031
Fax Number
+973 175 66001 |
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