1 SECURITISATION WORLD MENA 2007 KSA MBS (I) A CASE STUDY by S STOCKLEY March 2007 Dubai

KSA residential real estate is witnessing unprecedented growth and home finance likewise is growing rapidly SR 19 Billion ($5 Billion) in estimated real estate finance supplied in % of the market is serviced by commercial banks, which offer the cheapest financing but with restrictive eligibility criteria 8% of the market is serviced by specialized installment companies that on average charge 2% higher than banks With a 1.8% mortgage-GDP ration the KSA market has large growth prospects: 37% of the population lives in rental properties representing a large current demand for housing finance Only 10% of new residential properties are currently financed through home loans.

Mortgage Finance as a Percentage of GDP (Developed Countries)

 Constraints: o Lack of specialist mortgage finance firms. o Lack of liquidity into the mortgage finance market. o Lack of consumer education in mortgage finance o Lack of commitment to the industry by majority of players. o Lack of regulated legal system. o Lack of developed swap market Saudi Mortgage Finance Market

KIC has been a pioneer in the KSA mortgage market by offering the first 20 year home mortgage product KIC started operations in 2000 is the largest specialized housing finance company in KSA with a total market share of 2.28% Steadily built a sizeable portfolio with a strong performance track record Mortgage book of over $450 million and default rates of less than 0.5% KIC is a market leader in product features and client service Only specialized housing finance company to offer 20-year mortgages Only housing finance company offering pricing competitive to banks

KIC applies conservative lending standards and closely monitors arrears Credit Criteria of the RRBS Pool: Weighted Average LTV 78.99% Weighted Average PTI 29.29% Lending restricted to major cities Legal ownership of asset with financier until loan is paid off easing foreclosure Centralized credit approval process Arrears Management 55% of accounts paid by direct debit and post-dated checks Personal guarantors of client are financially liable for client Only 1 case of foreclosure in 4 years of operation, and successfully executed Arrears have never exceeded 0.22% of the portfolio and were 0.10% on December 30, 2004

KIC is a leading financier for its sister company DAR AL-ARKAN (DAAR) one of the large developers of residential real estate in KSA DAAR is geared up to develop 65,000 residential units in KSA in the five years from 2005 through 2009 DAAR has leading market share in residential real estate development in KSA, with Kingdom-wide geographical expansion DAAR is the first residential real estate firm in the KSA to obtain the ISO 9001 certification for applying quality management systems that ensure products compliance to international quality standards DAAR is a highly profitable and well capitalized business 2004 financial year performance  Total assets SR 6 billion  2004 financial year Gross Margin percent  ROE percent  Net profit SR 1.09 billion ($290 million)  Leverage 0.11

Future Developments KIC currently being re-structured as Saudi Arabia Homeloans (SAHL) and recapitalised at $550m making it largest specialised real estate finace provide in the Middle East. Newshareholders in SAHL will include : Arab National Bank (40%) International Finance Corporation (5%) Daar Al Alarkan (15%) KIC (40%) SAHL will be licensed by both Ministry of Commerce (MOCI) and Saudi Arabian Monetary Authority (SAMA). SAHL will shortly execute a second securitisation transaction ($400m) as part of the KSA MBS series (KSA MBS II)

All KIC lending is Sharia compliant All major/structural maintenance responsibility of the Lessor All minor maintenance due to daily wear and tear responsibility of the Lessee Lessor responsible to obtain and maintain all required insurance policies All excess proceeds from total/partial loss occurrences for the benefit of the Lessor All excess proceeds from condemnation occurrences for the benefit of the Lessor Ownership of the asset must rest with the Lessor All late payment charges levied against the Lessee must only be for covering the Lessor's administrative costs relating to recovering delinquent payments Prepayment penalties must be compensation for a specific loss to the Lessor and not just levied for the purpose of penalizing the Lessee Rental Payment Amount must be for a pre-agreed amount only to be amended on mutually accepted terms. Any taxes levied against the asset are the responsibility of the Lessor

Sharia Compliant Ijara or Istisna Lease Structure Seller Financier (Lessor) Buyer (Lessee) 1. Purchase price 2. Title and deed 3. Ijara finance Lease or Istisna Agreement 5. Rental payments 4. (Mortgage)6. Final payment 7. Title and deed

UIB Sharia Board approved Tawarruq Facility structure to enable the International Finance Corporation’s participation as guarantor

KSA MBS I International Sukuk Company Bond Structure

Terms of Issue TransactionResidential Real Estate Backed Securities (RRBS) IssuerKSA MBS International Sukuk Company Servicer/OriginatorKingdom Installment Company (KIC) Standby ServicerDar Al-Arkan Real Estate Development Company (DAAR) CollateralFirst ranking residential loans on KSA properties which meet the eligibility criteria Credit EnhancementExcess Spread from 22% over collateralization DAAR first loss guarantee to top- up Excess Spread to 10% of original balance IFC second loss guarantee for additional 10% of remaining principal balance Credit RatingA- by Capital Intelligence, Cyprus based international rating agency Issue Size$18.5MM backed by a housing finance lease pool of $23.5MM CouponFixed Rate (paid Quarterly) – 6.55% Purchase Undertaking Originator purchase undertaking to repurchase notes and underlying contracts 36- months from date of issue Legal Maturity2025 ListingBahrain Monetary Agency (BMA)

Reputable International Administrators ArrangersStandard Bank and Unicorn Investment Bank TrusteeBank of New York Cash Manager and Account Bank Bank of New York Standby ServicerDar Al-Arkan Real Estate Development Company (DAAR) Administration and Accounting Maples Finance Jersey Lead CounselLovells U.K. Local CounselWhite & Case Saudi Arabia Credit EnhancementInternational Finance Corporation (Private Sector Lending Arm of the World Bank)

Distinguishing Features of Transaction Pilot project but now concept proved part of a series of ongoing issuance programme Allows international investors access to exposure in KSA residential market for the first time True securitisation : True sale Off balance sheet treatment No recourse to originator Solid legal opinions from reputable law firms Demonstrates ability to merge traditional Islamic structure with best of practice in respect of Western securitisation technology

Lessons Learned Size does count Quality of data Systems and reporting ability Time, money, personnel Timing – market conditions Ratings – involve the agencies early Pricing “Build it and they will come”

The Way Forward In the “sweet spot” Fundamentals are right! Solid economic framework Strong investor demand Rating agencies and arrangers present in the market Reduced credit enhancement and over- collaterilisation Increased size and frequency of issuances (all asset classes) and reduced spreads (c.f. SA capital markets)

SA Capital Markets Issuance Levels Courtesy of

SA Capital Markets Spread Compression Courtesy of

Thank you Simon Stockley Mobile : Mobile : Fax : Fax :