Summit News

ABS may help match bonds with sharia: Moody's

LONDON (Reuters) - Asset-backed bonds, tainted by the credit crunch, could find a new market in the Middle East because they are more compatible with religious principles than other “Islamic bonds”, a Moody’s official said on Monday.

Islam bans interest, with bondholders instead paid returns derived from underlying assets. Questions have been raised over whether current Islamic bond structures, known as sukuk, truly transfer the risk of the assets to investors, and therefore whether they comply with Islamic law.

However, asset-backed financing -- in which the assets underlying a deal are sold to a special purpose vehicle and investors have recourse to the assets, not the originator -- may resolve this.

“Here you have genuine asset ownership, genuine asset exposure, cash flows are derived from those assets,” said Khalid Howladar, a vice president and senior credit officer at Moody’s Investors Service.

“There’s a lot of principles there that gel very naturally with Islamic finance,” he told Reuters at the Islamic Banking and Finance Summit in London.

However, the global shutdown in asset-backed markets -- sparked as investors shunned complex instruments after losses on securities linked to U.S. subprime mortgages -- has hurt the image of securitization.

“As we know, securitization is the most complicated form of financing ... and the regional timing is unfortunate given the current state of securitization in the market,” Howladar said. “But maybe this is an angle that can at least get one part of the market out of that credit gridlock.”

Demand could emerge locally for deals as early as the second quarter, Howladar said.

“If there is a genuine investor demand saying they want asset-backed sukuk ... maybe that will create a demand driver for something conventional markets currently have no taste for,” he said.

“These structures will be very esoteric. There’s probably not going to be much appetite here (in Europe) but there will be local appetite for the big names.”

Dubai-based mortgage lender Tamweel TAML.DU, which has already issued an asset-backed bond, said on Monday it would hold off on securitization plans at least until the year end due to market conditions, but said it could issue a non-asset-backed Islamic bond as early as March worth up to $500 million.

One reason for possible issuance is a basic need for financing. Despite high liquidity in the Middle East, banks are reaching their capacity for lending on real estate and to key clients who are expanding rapidly, Howladar said.

If they can issue securitizations and free up their balance sheets, they can then go on to lend further.

Reporting by Richard Barley; Editing by Quentin Webb