Selection of publications 2

FORUM FRANCOPHONE DES AFFAIRES
COMITE NATIONAL LIBANAIS
Le Liban et l’Espace Economique Francophone
Publication éditée par le FFA à l’occasion
des Assises de la Francophonie Economique
Beyrouth, octobre 2002

C:Documents and SettingsRoula SleimanMy DocumentsRoulaBSECLecturesIBBreaching Sovereign Ceiling-Conference IB, Data &
Investment Consult Forum-Monroe Hotel 17-12-02.doc
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Securitisation: Breaching the Sovereign Ceiling
By Iad Boustany, BSEC
December 17, 2002
When dealing in emerging markets, one of the main advantages of
securitisation/structured finance is the ability to breach the sovereign ceiling and
hence provide cheaper funding. In order to better understand this we will focus on (A)
the rating approach for securitisation, (B) the theory of sovereign ceiling, (C)
structuring techniques to breach the sovereign ceiling.
(A) The rating approach for securitisation
In measuring corporate risk, rating is a fact of life. The to-be-rated company cannot
influence or modify its previous performance, nor can it enhance its present strategic
positioning or improve its key success factors. Rating is hence viewed as an indicator
of the ability and willingness to generate cash flow and make timely payments in the
future given past performance and present strategic positioning. Rating standard
corporate unsecured unsubordinated bonds is a ‘predetermined’ process.
In structured finance rating is more of an objective. Theoretically nothing can impede
any Originator from reaching a AAA rating on its borrowing to the extent that it is
willing to pay the price of that AAA in terms of credit enhancement. Practically, the
cost of the credit enhancements might outweigh the benefits from the AAA rating.
The structuring bank’s role would be to determine the optimal enhancement levels
given (i) the Originator’s cost of funding, (ii) the market conditions and (iii) the
sovereign ceiling. The process begins with the Originator determining the cost of
funding that would render the structured finance deal interesting given his cost of
capital. Once the cost of money determined, a rough equivalent in risk is identified
and a rating objective determined. The Investment Bank is mandated and instructed to
design a structure that meets the designated targets. The investment
bankers/structurers will make the best use of legislations throughout different
countries and different enhancement techniques to set the structure which meet : (i)
legal perfected interest, (ii) fiscal efficiency, (iii) credit worthiness, (iv) accounting
‘de-linkage’.
Legal perfected interest in the underlying assets is a must. The securitisation aims,
among other things, at ensuring that the transferred assets are not affected by any
claims against the Originator. In other words, the assets transferred to the SPV are
remote from any claims from any other creditors. Hence the transaction must meet the
below stated requirements: (a) Perfection of legal interest in the purchased assets
assuring that the Originator’s eventual liquidators do not have any rights over the
transferred assets. (b) No prior claim over the assets. By prior claim is meant claims
by the Obligor himself (e.g. set off), claims by a third party (rights created in favor of
other creditors), and claims by preferred creditors, workers, etc. (c) No consolidation
of the SPV with the Originator. Consolidation, or lifting the legal veil, refers to the

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right of the judicial authorities in disregarding the veil of separate legal entities that
dissociate the Originator from the SPV.
Fiscal efficiency is reached when (i) exemption from stamp duty tax on the numerous
agreements to be executed is ensured, (ii) exemption from withholding tax on interest
payment to be made from the obligors to the SPV and from the SPV to the Investors
is ensured, (iii) exemption from property transfer tax on transferred assets is ensured,
and (iv) income tax and other double taxation are avoided.
Creditworthiness is reached through credit enhancement techniques. Those techniques
are numerous but can be summed up under three main themes: (a) internal credit
enhancement like subordination or sequentiality between the issued note or the
insertion of triggers that would modify rights over the cash flows, (b) external credit
enhancement using swaps and insurances and (c) over-collateralization.
Accounting ‘de-linkage’ is only reached when the transaction is eligible for ‘sale
treatment’. Under IAS 39, derecognition of assets is governed by the ‘substance over
form’ principle. Only when the assets have been sold ‘in substance’ can they be
derecognized from the balance sheet. But what is a sale ‘in substance’? A sale ‘in
substance’ in not limited to a ‘legal sale of assets’, it is rather the full relinquishment
of control over the assets as well as a substantial relinquishment of risk and rewards
form the sold assets. This ‘in substance sale’ is better known as True Sale. Once True
Sale is achieved, the bankers/structurers must make sure that the SPV is not
reconsolidated under another IAS rule which is SIC 12.
(B) The theory of sovereign ceiling
The cost of funding for healthy companies in emerging markets and more specifically
poorly rated countries is an issue. The rating agencies have developed the theory
whereby no company would be allowed a higher rating than that of the country in
which it is operating. The concept better known as the sovereign ceiling is based on
the underlying assumption that a sovereign default will force all domestic issuers or
obligors to default as the sovereign will necessarily impose restrictive measures
impeding access to hard currency necessary to service their obligations. This indicator
is very hard to measure in absence of conclusive experience and comprehensive
intellectual framework. And in absence of comparative methodology this concept
(sovereign ceiling) remains impossible to synthesize and express using rating
symbols.
Traditionally, a sovereign’s rating on its foreign currency has been viewed as the cap
on rating for every private issuer domiciled in that country. Sovereign rating is the
ability and the willingness of the sovereign to make timely payment of principal and
interest. Furthermore sovereign rating has also been viewed as the best proxy for the
sovereign ceiling.
But sometimes, sovereign rating is not the best proxy for sovereign ceiling. Sometime
the likelihood of default is a much bigger risk than forced default and government
interference in private sector hard currency debt repayments. A first example is given

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by Panama or the EU members. In such countries, exchange controls are difficult to
implement. By joining the single currency and the ‘pacte de stabilité’, the EU
members have relinquished monetary and foreign exchange policy to the independent
European Central Bank. A second example is given by rating agencies who do not
view local currency guidelines or local currency rating as a ceiling. In such cases they
will consider any corporate or structured deal on a ‘stand-alone’ basis by focusing on
the transaction’s own merits ‘absent country risk’.
The sovereign ceiling theory has no scientific grounding or justification known to us
nor has it been demonstrated via a ‘debat contradictoire’ . It seems that this theory is
more of a dogmatic approach that provides an intellectual comfort for rating agencies
with limited time and resources to dealing with a variety of cultural models in
business. This theory also neglects any other corporate organization than the one
based on the written contract. It totally neglects the binding effects of know how,
notoriety, pledge, and other social or cultural constraints characterizing none western
societies. Such cultural issues are also found in some industries in Europe like the
diamond market in Anvers. One might refer here to the works of David Freidman as
detailed in his reference book ‘Law’s order’.
One can also point out that the sovereign ceiling theory has been put aside by its own
genitors for specific political reasons. Some countries have earned investment grade
rating while lacking the basics of any investment grade requirement. Countries like
Japan and Korea officially objected the rating agencies discriminatory practices.
(C) Structuring techniques to breach the sovereign ceiling.
Several techniques allow breaching the ceiling. But before describing such structured
finance techniques, one must begin by determining the risks. Traditionally emerging
market risks include: Convertibility, transfer, devaluation, expropriation, political
violence, freeze on deposits, legal risk and economic environment risk. The
aforementioned list is not exhaustive. It is nevertheless considered that the main
emerging market risk is the Transfer/convertibility risk. Addressing the other risks is
out of the scope of the present document.
The first set of structuring techniques used by investment bankers and securitisation
specialists in their effort to address sovereign risk issues is based on the ability to
capture hard currency outside the scope of government intervention and beyond
government’s reach. These techniques are referred to as ‘bypassing the exchange
controls’. The first technique is Future Flows: Many securitisations emanating form
Turkey, Brazil, Egypt and Mexico have achieved BBB (AAA where a monoline
insurance wrap has been obtained) by capturing hard currency cash flows in bank
accounts located off-shore. The Originator, typically an exporter, assigns the
receivables and instructs its clients to settle their due in an off-shore account
administered by a Trust. The only way a government can affect such a structure is if
consolidating the SPV with the Originator and then considering any payments to SPV
as part of his scope of intervention. It is worth noting that sophisticated structuring
techniques can address such issue and avoid SPV consolidation. The structure is not

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totally immune from country risks because it will always be limited to the Originators
capacity to continue generating the needed receivables. Another technology often
used in future flow deals is the Supply Bonds. An insurer will cover supply risk by
paying the trustee if the Originator fails to deliver the goods. Another technology used
to bypassing the exchange controls and country risks is the swaps and guarantees that
can be locked into a structure and triggered in the event of forced default or lack of
access to foreign currency. In this case the guarantor or the swap counterparty will
make hard currency payments to the SPV and will be entitled to whatever fund
available in local currency or on-shore accounts. Currency swaps are used to address
the devaluation issues as well as transfer risk and convertibility risk. A swap trigger
promising to pay abroad if sufficient local currency funds are collected domestically
will allow the cash flow to bypass government controls. Apart form the commercial
insurers, two main agencies underwrite emerging market risks: OPIC (Overseas
Private Investment Corporation) a US government agency and MIGA (Multilateral
Investment Guarantee Agency) the World Bank subsidiary. Rating agencies awarded
insured transactions with above sovereign rating (MSF deal in Brazil). It is worth
noting that the deal will only reach a stand-alone rating level. Should the structure
collapse or the obligors default OPIC and MIGA will not be obligated to make
payments. Alternative structuring technology like the Bonex structures exist and can
lift a deal above sovereign.
The Investment banker can structure a deal in a way to outlast the exchange controls.
It consists at providing access to foreign currency for the expected duration of the
exchange controls. Two techniques are here available. The first is to fund an off-shore
account with enough cash to outlast the exchange control period. The funds should be
applied on satisfaction of interest due to investors. It is unclear whether rating
agencies would require providing for principal payments. But how to determine the
time frame for exchange controls? This period as set by rating agencies was of 12 to
18 months before the Argentine crisis. It is now of 24 months. This technique has
become a very expensive mitigation tool. The second option available to structuring
banks is the risk triggers who’s role is to legally increase the weighted average life of
the notes in order for them to outlast the control period. During the periods of
exchange controls, all money is captured in a Guaranteed Investment Contract (GIC
Account). The amounts are in hard or local currency and used to pay the notholders
once the controls are lifted.
Some bankers/structures prefer using exemption form control technologies in order to
reach above sovereign ceilings. Such techniques are most effective in emerging
economies characterized by an overwhelming industry sector or company exempt
from controls due to its strategic importance. Usually such players enjoy prior access
to foreign exchange and history of exemption form the measures impeding foreign
debt service. Multi-lateral B-loan is the second technique that can be designed to
achieve better than sovereign rating using exemption of controls technologies. Here a
multi-lateral organization funds an emerging market borrower, sub-participates the
loan to an SPV which issues bond to investors. The multi-lateral agency lends to the
structure its ‘preferred creditor status’. The assumption is that countries in financial
distress need urgent backing form multi-lateral agencies. Hence they will not risk

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compromising the relationship by defaulting on any payment due to any such entity.
The structure relies on the incentive for government not to impose controls and
historical evidence indicates that any transfer ban would not apply to a particular
creditor in a specific deal.
Securitisation deals structured in dollarised economies, with structural linkage to hard
currencies can benefit from an above sovereign rating. This is not a structured finance
technique but more a sovereign strategic move to increase Direct Foreign Investments
and capital drain. It is the sovereign’s self limitation of control power that provides
bankers and rating agencies with the firm belief that private entities are not capped
anymore. This is the case in Europe where Greek transactions can reach a AAA rating
although the sovereign in 5 notches below. It is also the case in Bahrain or Bermuda
or Panama. A very poor intellectual framework and evident lack of convincing
scientific evidence are the main characteristics of this specific exemption from
sovereign ceiling theory. This issue seems more motivated by some geo-political
considerations.
Under investment bankers pressure and evermore innovative structures, rating
agencies have loosened their requirements and somewhat undertaken a shift in their
policy proposing and accepting solutions for breaching the sovereign ceiling. In June
2001 Moody’s has announced that the debt of emerging markets may not be
constrained to the country ceiling where (a) the creditworthiness of the borrower is
judged to be sufficiently high and (b) the likelihood of a general moratorium in the
event of a government default is sufficiently low and (c) where the Obligor has
special access to foreign exchange. They have not yet dared questioning the
mainstream theory they have so much contributed in putting in place.

Perspectives de la Titrisation au Liban
Intervention de Iyad Boustany au CEDROMA,
Université Saint Joseph, le 26 mars 2003
Excellences,
Chers amis,
La place prépondérante de la technologie dans notre quotidien nous pousse à
une erreur de perspective associant automatiquement le neuf au meilleur. La
technologie est le domaine par excellence ou, effectivement, le neuf est
synonyme de meilleur. Mais ce qui s’applique à la technologie ne s’applique
pas forcément à la finance et au droit,…..Une idée, une pratique n’est pas
meilleure qu’une autre tout simplement par ce qu’elle lui succède dans le
temps. Dire que la titrisation est une innovation ne nous informe pas sur
l’apport de cette innovation et son éventuelle supériorité sur les autres modes
de financement ? Et si tel était le cas dans quel cadre peut elle se
développer ? Notre intervention portera dans un premier temps sur (i) ce que
la titrisation apporte de plus au Liban et dans un deuxième temps sur (ii) le
cadre nécessaire à son bon développement.
I- Qu’est ce que la titrisation apporte de plus
La titrisation se résume dans sa substance dans la transformation des
caractéristiques d’un actif. Cette transformation altère toutes les composantes
de l’actif : son immobilité devient mobilité, son indivisibilité devient divisibilité,
sa sous performance devient sur performance. Certains ont été jusqu’à dire
que la titrisation transforme le plomb en or. Ce passage se fait par
l’intervention, on est tenté de dire l’alchimie du TRUST, cette entité centrale
au cœur de la titrisation et qui permet cette modification des caractéristiques.
Ainsi, un actif se transforme en un autre actif via le Trust. La définition
évacuée, voyons ce que la titrisation apporte réellement de plus aux
entreprises et aux investisseurs.
I-(i) Ce que la titrisation apporte aux entreprises
Pour les entreprises traditionnellement condamnées au financement bancaire,
les banques d’affaires semblaient apporter du nouveau. Mais leurs premières
expériences des banques d’affaires sont loin d’être concluantes puisque ces
dernières se sont attelées à travailler le passif de leurs clients. Or le passif
des bilans des entreprises libanaises est étriqué et déséquilibré. Il est le fruit
d’un double et fragile équilibre : d’abord l’équilibre entre dette et capital et
ensuite l’équilibre au sein même de la structure capitalistique. L’actif des
entreprises, par contre, y offre un espace de travail conséquent et dispose
d’une taille plutôt respectable pour développer les métiers de la banque
d’affaire. L’actif du bilan de ces entreprises se distingue par son caractère
risqué pour l’entreprise (risque commercial), coûteux pour elle (car ne
générant aucun revenu et ne portant pas d’intérêts), lourd en conséquences
sur sa gestion (car nécessitant des équipes de gestion, de recouvrement,
etc.) et pesant pour son bilan (car dégradant les ratios financiers). Le
traitement de cet actif est, non seulement possible, mais souhaitable pour
l’entreprise. C’est là ou la titrisation apporte un plus, en effet:

♦ La titrisation dé-comptabilise l’actif du bilan;
♦ La titrisation ne pèse pas sur la structure du capital des
entreprises : les luttes de pouvoir induites par les
opérations sur le capital sont ainsi évitées ;
♦ La titrisation ne modifie pas la structure d’endettement de
l’entreprise : il s’agit d’un off balance sheet financing qui
n’augmente pas la dette et son corollaire en termes de
publicité à la centrale des risques ;
♦ La titrisation améliore les ratios bilanciels de rentabilité et
de liquidités ;
♦ La titrisation donne lieu à des retombées image et
marketing très favorables ;
♦ La titrisation préserve les lignes bancaires pour des
opérations stratégiques de haut de bilan.
I-(ii) Ce que la titrisation apporte aux investisseurs
On a vu que la titrisation est donc intéressante pour les entreprises. Mais
qu’en est il des investisseurs ? En effet, les diverses opérations de titrisation,
en décloisonnant les marchés du crédit et/ou de ceux du risque, sont taillées
sur mesure pour répondre à l’attente des investisseurs en termes de
rémunération, de risque et de maturité. En transformant, par exemple, un
crédit hypothécaire (mortgage loan) ou un crédit inter-entreprise (trade credit)
en un titre négociable, un crédit long terme en investissement court terme, un
non-performing loanen un titre «AAA » la titrisation contribue à l’optimisation
des modes d’allocation du capital, à la multiplication des opportunités
d’investissement tout en favorisant une vérité des prix. Elle joue donc un rôle
charnière dans le financement des entreprises et, pour les investisseurs, un
rôle dans la double augmentation d’abord des opportunités d’investissement
et ensuite de la rentabilité par investissement. La titrisation opère un lien entre
les différents marchés spécifiques et cloisonnés du crédit et celui organisé et
standard de la bourse.
La motivation pour les autres intervenants et qui se trouve derrière l’utilisation
de la titrisation est l’arbitrage. Ce terme est utilisé pour qualifier un état ou,
toute chose égale par ailleurs, le cédant diminue son coût du crédit et
l’investisseur augmente sa rentabilité. L’imagination fertile des financiers est
tendue vers un but : la capture du plus de valeur possible.
II- Dans quel cadre s’épanouit la titrisation
Si nous convenons de l’utilité et même de la nécessité de la titrisation comme
mode de financement dans le paysage financier libanais il reste donc à savoir
quels sont les efforts à consentir, les reformes à entreprendre pour y arriver.
La titrisation, pour réussir, requiert (i) des ajustements que je qualifierais de
spécifiques ou techniques propres à la bonne structuration d’une opération et
(ii) des ajustements environnementaux dans lesquels s’insère l’opération de
structuration.

II-(i) Les reformes techniques
La titrisation relève autant de la finance d’entreprise que de la finance de
marché. Or les marchés des capitaux sont le maillon faible de la place
financière de Beyrouth. Et qui dit marché dit offre et demande, liquidité, prix,
des indicateurs tous basés sur des instruments acceptés et fiables de mesure
du couple risque/rentabilité. Je me bornerai donc à proposer ici les reformes
qui auraient du avoir lieu il y a dix ans sur la place de Beyrouth. J’évoquerai
uniquement les points essentiels (a) l’infrastructure de quantification de la
rentabilité, (b) la superstructure de mesure du risque, (c) les outils de
contournement du risque.
(a) L’infrastructure de quantification de la rentabilité n’est qu’une des
applications d’un concept beaucoup plus large qui est celui de la
transparence. L’infrastructure appelée de nos vœux n’est rien d’autre qu’un
institut public ou privé chargé de collecter, traiter et diffuser les informations
financières (faut il préciser que ce n’est pas le cas au Liban aujourd’hui) au
triple niveau micro, meso et macro-économique. Une simple modification du
Code de Commerce rendant obligatoires les dépôts des comptes suffit. Fama
et Von Hayeck, concepteurs et architectes du monde de l’information disaient
il y a vingt ans déjà que ‘l’information est la matière première des économies
de marché’. La communauté européenne a entendu cet appel et compris le
message en consacrant deux directives à l’information (la 4eme et la 13eme)
dans le cadre de la constructionde l’Europe.
(b) Quant à la superstructure de mesure du risque, elle consiste en la mise en
place d’un organisme de notation des crédits sur la base de ‘National Scale
Rating’. Cette institution jouerait un double rôle d’abord (I) permettre au
marché une rationalisation des coûts du risque sur la base de la vérité des
prix et ensuite (ii) créer le climat de confiance suffisant pour casser le tabou
idéologique autour du dépôt bancaire permettant au déposant de faire le
choix de la désintermédiation et transformer son dépôt improductif en
investissement direct. Cet organisme devrait être géré par l’une des agences
internationales de notation.
(c) Enfin, concernant les outils de contournement du risque, il est possible de
mettre en place un organisme chargé de pallier aux faiblesses inhérentes à la
structure économique, juridique et politique libanaise en garantissant contre
ces risques. Dans les pays démocratiques, le pouvoir est extrêmement
sensibilisé aux besoins de ses concitoyens et soucieux de préserver leurs
outils d’ascension sociale qu’est l’entreprise. Par là, et dans le but de
permettre un maintien de la compétitivité des entreprises les gouvernements
encouragent ces types d’assurances permettant l’accès aux marchés des
capitaux avec du papier AAA. Il s’agit des Monolines ou encore des assureurs
d’opérations financières. Les gouvernants libanais ont évidemment d’autres
soucis que ceux de leur pairs dans les pays démocratiques. Nous ne pouvons
qu’appeler à la mise en place, en Europe mais pour le compte exclusif du
Liban, de cette institution qui permettra aux entreprises libanaises d’accéder à
du financement à des coûts compétitifs.

II-(ii) Les réformes environnementales
Le développement des marchés des capitaux n’est que le reflet du
développement d’un pays. La bourse n’est en fin de compte qu’un baromètre
de cette croissance. La léthargie actuelle de la Bourse de Beyrouth ne reflète
que l’état de l’économie du pays. Développer les marchés des capitaux exige,
présuppose et accompagne le développement économique global. Or le
développement est en substance faire le choix de la Liberté. Je bornerais ici à
citer quelques conclusions d’éminents économistes, je vous les livre tels
quels:
♦ Le prix Nobel d’économie, conseiller du Président de la
Banque Mondiale, Amartya Sen résume dans sa thèse que le
développement économique ne peut se faire sans liberté. Sa
thèse est d’ailleurs intitulée :’Development as Freedom’. Sa
notion de la liberté ne se limite pas à la liberté politique, le mot
doit aussi être compris comme ‘émancipation’ (taharror) de la
religion, de la pauvreté, des castes ou classes sociales, des
clans ou tribus….. ;
♦ Alain Peyrefitte penseur du développement insiste que ‘le
développement économique avant d’être un taux de
croissance, est un choix de valeurs’. Ethos de comportement
compétitif, fois dans un ordre juridique impartial et juste ;
♦ Jean de Witt place la liberté religieuse et juridique comme
facteurs présupposant tout développement économique ;
♦ Spinoza et Locke tout deux refusent de proposer une
réflexion sur les fondements éthologiques de la modernité et
du développement hors du cadre de la liberté ;
♦ Hegel en parlant des phéniciens affirme que leur
développement est du à une société qui vit ‘en confiance’
confiée à elle même. Hegel parle d’hommes audacieux, libres
et responsables ;
♦ Bastiat, Shumpeter et Von Hayeck professent que l’autorité
politique, religieuse, sociale, centralisée ou autoritaire étouffe
et la liberté et le développement ;
♦ Robert Lucas, l’un des maîtres de l’école de Chicago insiste
que la combinaison du capital et du travail ne suffit pas à
expliquer le développement. Il propose d’insérer dans ses
équations mathématiques un tiers facteur immatériel ;
♦ Francis Fukuyama, malgré les critiques que nous pouvons lui
faire est allé jusqu’à intituler son livre dédié au rapport entre
démocratie et développement : ‘trust’.
Liberté comme tolérance, liberté comme confiance, liberté comme esprit
critique, liberté comme responsabilité individuelle et collective, liberté comme
émancipation, liberté comme principe de subsidiarité… telle est la condition
sine qua non au développement de l’économie et des marchés financiers.
Chacun des théoriciens de la modernité et du développement à contribuer à
mettre à nu un de ses multiples aspects. La synthèse, elle, est venue à la fois
du Pape Jean Paul II dans son encyclique Centesimus Annus (1991) et du

prix Nobel d’économie Kenneth Arrow qui affirment ensemble: L’activité
économique n’est jamais que l’épanouissement d’une exigence de liberté.
En conclusion
En guise de conclusion un dernier mot sur la titrisation de gouvernement,
sujet particulièrement à la mode au Liban. Je me permets de reprendre à mon
compte Locke, le grand philosophe Anglais du XVIIe, qui est, sans doute, à
l’origine de la première opération de titrisation décrite en 1666 dans ses
‘essais sur la tolérance’ ; je cite: ‘ce qui scelle le passage de l’état de nature à
la société moderne c’est le TRUST. Ainsi Locke semble confirmer le contenu
de mon introduction ou, je vous le répète, la titrisation est la transformation via
Trust d’un ‘état’ vers un autre ‘état’. Locke continue pour dire: Cette structure
juridique correspond à une responsabilité confiée en dépôt ; Rois, Ministres,
Assemblées ne sont que des dépositaires de la confiance. Excellences, chers
amis, je vous l’affirme : c’est là la vraie titrisation de gouvernement.

June 2003 Page 1 of 4
Bankruptcy Rem oteness
June 2 00 3
This document issued by Bemo Securitisation SAL is for discussion purposes only. The information contained in this
document has been compiled in good faith, but no representation or warranty is made as to its accuracy or
completeness. This document is confidential and must not be distributed to any person not involved in the transaction
without the consent of Bemo Securitisation SAL. The Notes are only suitable for sophisticated investors who are
capable of understanding and evaluating the risks involved in investing in the Notes. This structure is the intellectual
co-property of Bemo Securitisation SAL. All or part of the structure (‘Fiduciary Securitisation Framework’© )
contemplated and envisaged in this Term Sheet is or might be registered under Lebanese law, Statute 75 of April 13th
1999. Thus it is fully protected against any type of total or partial imitation, copy, reproduction, etc. Any attempt to
replicate such a structure without the prior written consent of its owners will give rise to legal action.
© All rights reserved; no part of this document may be reproduced, stored in a retrieval system, or transmitted in
any way or form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior
written permission of Bemo Securitisation SAL. This document may not be lent, hired out or otherwise disposed of in
any form of binding or cover other than that in which it is published without the prior consent of Bem o Securitisation
SAL.
I n a securitisation transaction, the legal structure should ensure that (a) a
bankruptcy of the originator does not lead to any im pact on the assets of the SPV,
(bankruptcy rem ote feature) and (b) that the SPV does not file for voluntary
bankruptcy, or there is no involuntary bankruptcy action taken against the SPV
(bankruptcy proof feature).
I -Bankruptcy rem oteness feature
One of the basic aims in securitisation is to ensure that the assets transferred to
the SPV are not affected by any claim s against the originator. In other words, the
assets transferred to the SPV are param ount property of the SPV with no claims of
any other creditors. From this viewpoint, there are 4 basic steps to be taken: (1)
Perfection of legal interest in the SPV, (2) No prior claim s of any person, (3) No
consolidation of the SPV with the originator, (4) No claw back
1 ) Perfection of legal interest:
4 potential threats to rights of SPV/ investors
a) Transfer of interest by originator was not legally perfect, or was not a "true
sale".
b) Transfer of interest was true sale, but is subject to over-riding, prior claims
that get transmitted to the SPV.
c) Transfer of interest was a true sale, but the SPV holding such interest is
treated as substantively a sub-set of the originator, clubbing the assets
and obligations of the two.
d) The transfer was a transfer in anticipation of originator bankruptcy, and
hence, is voided by Court.
Perfection of legal interest implies the creation of legal rights in the assets in favor
of the SPV. However, there is a lurking fear of a Court regarding the substance of
a transaction as financing. Besides, in several countries, there is a possibility of
lack of clear law inhibiting securitizations. If the securitisation transaction has
passed on legal interest in the assets to the SPV, the liquidator of the originator in
bankruptcy does not have any right against the assets. This would be true even if
the originator is assigned the role of collection. As collection or servicing agent,
the originator has no better rights than those of a postman. Hence, the

liquidator’s rights will be lim ited to only such rights as the originator himself had.
2 ) Priority of claim s:
By priority is meant the suprem e legal rights of the SPV on the assigned/ sold
assets. There are two inherent thoughts here - (a) there should not be any
existing claim s against the assigned/ sold assets, either, of the obligor himself
(such as claim for set-off, waiver, or cross-default) or of any other party (such as
rights created in favor of other creditors already); and (b) there should not be any
subsequent claims of any third party such as claims of workers of the originator,
preferred creditors, etc.
As far as pre-existing prior claim s are concerned, the law provides that the
transferor of any assets transfers them with the same features and disabilities
that existed at the time of transfer. So any prior claims set-off or other rights that
existed at the tim e of assignment would constrain the rights of the SPV.
I f any prior rights existed at the tim e of assignment, those would also affect the
predom inant rights of the SPV. For example, if any tax claim or claim of a creditor,
or a security interest in a specific asset, exists at the tim e of assignm ent, the SPV
would acquire the same subject to such pre-existing right.
A usual situation is where the originator has outstanding loans where the lenders
have security interest in all present and future assets of the originator. I n law, a
general security interest such as charge over all present and future assets is a
floating charge, and a floating charge is vacated when the asset is sold off.
However, if the lender’s interest was a fixed charge, the SPV would be affected by
such charge.
Next, com es the question of subsequent prior claims on the assets of the
originator. There are usual statutory preferential claims in winding up. These are
either dues to the state, or dues of workers etc which are treated as preferred
claims, and they take priority over claims of all secured creditors. However, none
of these rights to preferential paym ents shall affect the SPV holding legal rights in
assets, as the assets already stand transferred to the SPV and have since become
the property of the SPV.
3 ) Protecting against consolidation:
Consolidation or lifting or piercing the corporate veil refers to the right of judicial
or other authorities in disregarding the veil of separate legal entities that
dissociates the originator from the SPV, and treating the two as one. In other
words, the aggregation of the assets of the SPV with those of the originator. This
is possible if the judicial authority com es to reckoning that the creation of a
separate legal entity in form of the SPV was merely an arrangement or colorable
device, that the SPV is only an alter-ego for the originator and that the whole
scheme is not to be given any legal effect.
One of the biggest threats to securitisation structure is the possibility that a Court,
tax authority or other agency would treat the SPV and the originator as one. The
very essence of securitisation, it may be noted, is to decompose the com pany and
break and take away its assets into a separate entity which has legal rights of its
own over the properties transferred to it. I f consolidation of the assets of the SPV
is done with those of the originator, it would amount to a nullification of the
process of securitisation.

4 ) Protecting against claw back:
Claw back refers to the legal provisions which entitle an authority, normally in
case dealing with bankruptcy, to treat any transfer of assets, even though legally
made, as void, and therefore, claw back or reclaim the assets already transferred.
Such claw-back provisions are normally applicable to a company that goes into
bankruptcy.
This bankruptcy rule is called a rule to avoid transfers in contem plation of
bankruptcy. The underlying rationale of the rule is that certain transfers if made
imm ediately before bankruptcy of an entity will be regarded as transfers made in
contemplation of bankruptcy, as a fraudulent preference, and will be avoided, that
is, held illegal. Exception is made for "transfers in good faith and for valuable
consideration".
Since the effect of the above provision is not to mandatory avoid transfers made
sometim e prior to bankruptcy, and more so, transfers made in "good faith" are
protected, securitisation deals would not killed even if the originator files for
bankruptcy soon after the assignm ent. But then, good faith, lies in the eyes of the
beholder - therefore, one m ust be particularly careful for securitizations m ade by
distressed of potentially distressed companies.
I I -Bankruptcy proof features
While the first feature is satisfied by an irrevocable legal transfer of the assets
from the originator to the SPV, if any action in bankruptcy is initiated, the entire
purpose of the structure may be foiled. The fear is that after transferring the
assets, the originator himself may play games and initiate a voluntary bankruptcy
action if the SPV is essentially under the control of the originator.
I n the case of a corporate SPV, where the SPV is owned by the originator of the
securitized assets, rating agencies require that an SPV have at least one, and
sometim es more than one, independent director on its board of directors, that is,
someone who is not also on the board of the parent company. The SPV’s
organizational docum ents would then require the vote of greater than a simple
majority of the directors, including in that vote the independent directors, for the
board to approve a voluntary bankruptcy filing. The requirement of an
independent trustee is relevant in case of trust form also.
1 ) I nvoluntary Bankruptcies
An involuntary bankruptcy case can be comm enced by any person who has an
amount to receive from the SPV - the creditors of the SPV. Normally, the SPV will
not be allowed to engage any employee, but it might have to incur expenses for
fees, accounting services, etc. To reduce the risk of an involuntary filing against
an SPV, third-party creditors of the entity (typically, professionals, including
attorneys and accountants, and financial institutions providing funding or services)
are asked to execute an agreem ent that they will not file an involuntary petition
against the SPV until m ore than one year has passed after the asset-backed
securities have been repaid.
2 ) Lim itations on purpose and business:
The constitutional docum ent should define the purpose of the SPV: merely to hold
the assets, collect them, pass them on, reinvest them (if a pay through or bond
structure) etc. The SPV would be given no other power to carry on any other
activity.

3 ) Lim itation on life:
The SPV would stand dissolved on satisfaction of the securitisation transaction. I f
any steps are to be taken to dissolve it, the same should be outlined.
4 ) Lim itations on Debt Obligations:
Generally, the indebtedness of an SPV m ust be lim ited to (a) the asset backed
securities; and (b) indebtedness to credit enhancers (if any) and other liabilities
incurred in the ordinary course of business relating to the ownership and
operation of the securitized assets. Under certain circumstances, subordinated
debt m ay also be perm itted.
5 ) Liens and Security I nterests:
Typically the securitized assets can be subject to no voluntary liens or security
interests other than liens in favor of the holders of the asset-backed securities.
Exceptions can be made to the extent assets may be used to secure liabilities to
letter of credit issuers or to provide liquidity support.

A EUROMONEY PUBLICATION
2 0 0 3 / 2 0 0 4
Global Securitisation Review

Market review for the
MENA/GCC region
by Iad H. Georges Boustany, BSEC, Bemo Securitisation S.A.L
The MENA market is witnessing increased activity on the securitisation front,
ranging from regulatory developments to the completion of an important
number of transactions, notably in Egypt, Lebanon and the GCC, and the
evolution of Islamic financial structuring.This article will focus first on the
importance of securitisation for emerging economies, with an assessment of
the proposed opportunities. Secondly, it will review the hurdles that face
structuring from regulatory, financial, accounting, tax, capital markets and
rating perspectives. Finally, it will examine the new opportunities in this
market, essentially through the emergence of Islamic finance.
70
Why securitisation helps companies
in Emerging Markets (EM)
The last two years have witnessed a regained
interest in investment banking activities in emerging
markets, after a tough period of stagnation and
downsizing.The market has become more mature,
modest and realistic.Traditionally, emerging markets’
investment banks offered the same product range as
in developed markets, mainly standard debt and
equity solutions, such as bonds issuance, mergers or
IPOs.This product range proved to be totally
inadequate and reflected a deep misunderstanding of
the nature of the market.The investment banks’
activities were constantly and inexorably directed
towards corporate finance and capital markets.The
investment banks’ miscalculation and permanent
accounting losses contributed to promoting the idea
that no investment banking activity was possible in
emerging markets, while investment bankers ignored
opportunities offered by the customers’ growing
assets.The main reasons that both corporate finance
and capital market activities did not appeal to
customers are:
• the family nature of business;
• the absence of growth perspectives;
• under capitalisation of organisations;
• a massive usage of short-term funding; and
• lack of strategic vision.
Figure 1 highlights the fundamental weaknesses of
traditional investment banking offerings (bonds,
IPOs, mergers, etc.) to emerging market companies.
On the other hand, it seems that the
development of investment banking activities in
emerging markets could be achieved through the
development of structured finance. In fact, the asset
side of the balance sheet offers many interesting
features to develop high added-value financial
services.
The reasons the EM companies are appealing for
structured finance activities, particularly
securitisation, are:
(1) the current assets represent 30% to 40% of the
total assets;
(2) these assets can, to an acceptable extent, be
Figure 1: Fundamental weaknesses of traditional investment banking offerings
Corporate finance Capital markets
Capital Small size transactions Totally illiquid
Ego problems One way market
Will for autonomy Lack of serious transparency
No perspectives for growth No culture for dividends’ distribution
No perspectives for growth
Information shortage
Debt The debt market is well Small size for investment
served by local banks bank operations
The size of bond issuance is Lack of information and
related to equity which risk benchmark
is generally weak

laws. In the absence of such laws, setting up an SPV
that meets the required standards of flexibility and
bankruptcy remoteness becomes an issue.
The first solution that comes to mind in such
markets is the usage of an offshore vehicle. In fact,
offshore vehicles are, to a large extent, tolerated by
MENA legislation. But in the case of Saudi Arabia
and other emerging markets, sale of (some) assets
to non-citizens is strictly prohibited! A way around
this second hurdle is to set up a two-tier structure:
an “Owner SPV” and an “Issuer SPV.” In the absence
of trust laws and securitisation laws, the Owner SPV
will have to be a limited liability company.This raises
other hurdles, especially in light of Saudi legislation
with respect to losses. In case losses exceed three-
quarters of capital (and not shareholders equity!),
the shareholders will face a risk of removal of the
limitation of the liability. In fact, the losses must
either be absorbed by an immediate capital increase
or initiate immediate liquidation of the company.
Failing to do so, the partners will become jointly and
severally liable for the debt of the company. It is
therefore easy to understand why setting up trust
services, under such circumstances, continues to be
very difficult.
Of course, the Arranger can always establish the
Owner SPV as a subsidiary of the Originator.This
solution exposes the Owner SPV to two risks: (i)
consolidation risk, which in itself contradicts the
purpose of the transaction, and (ii) control over the
assets, especially in a situation where conflict of
interest occurs; the Originator being usually the
holder of a junior tranche. It seems clear that having
the Owner SPV as a subsidiary of the Originator is
not satisfactory in the absence of autopilot schemes
(pre-determined management powers) and/or
specific legislation. Specific structuring techniques can
address the Owner SPV bankruptcy remoteness
issues to an acceptable extent.Yet, this requires skill,
imagination and flexibility from all parties to the deal.
Accounting standards
The accounting standards are not standardised
throughout the MENA region. Some countries have
shifted to International Accounting Standards (IAS),
others have implemented a mixture of Financial
Accounting Standard Board (FASB) and IAS, and
finally some countries have kept their own national
standards. In Lebanon for example, IAS apply
according to the financial ministerial order N.6258/1
introduced in August 21, 1996 and improved on June
14, 2001, according to N. 673/1. De-recognition, sale
accounting, consolidation and claw back are then
favourable to securitisation transaction.
In the case of GCC, and more specifically the
Saudi Arabian market, accounting standards have
71
transferred;
(3) such transactions have no impact on the capital
structure of the customer;
(4) off-balance-sheet financing does not increase
debt;
(5) positive impact on the balance sheet, improving
return and liquidity ratios;
(6) lower cost of funding than the traditional bank
loans;
(7) positive marketing impact; and
(8) the bank lines are saved for strategic
investments.
Securitisation seems to be the appropriate tool
to satisfy the financing requirements of emerging
market companies.Yet many legal and cultural
hurdles impede the full development of the
securitisation activity in these markets.
What are the challenges?
Absence of regulation
Although some assert that a securitisation law must
be enacted prior to conducting securitisation
activities, experience shows that securitisation can
occur in the absence of any specific legislation. In
Lebanon for instance, the transfer of assets can be
done according to article 280 of “Code of
Obligations and Contracts,” or based on the
fiduciary Trust law N.520 of June 6, 1996 that deals
with “Financial Markets Development and Fiduciary
Contracts.”
The Special Purpose Vehicle (SPV) could be either
a company with a variable capital regulated by the
Commerce Code, a community according to “Code
of Obligations and Contracts” or a Fiduciary
regulated by Central Bank Directive N. 6601 of May
23, 1997.This transfer can be done on a true sale
basis. Marketable securities are regulated by article
252 of Code of Commerce, and their trading on the
Beirut Stock Exchange has been easier since the
introduction of a new section in Decree N.7667 of
December 16, 2000, which encourages innovation
and allows “all other securities or financial negotiable
values”.
What seems easy and straightforward in Lebanon
appears more complicated in other jurisdictions
such as Saudi Arabia,Turkey or Egypt. In Saudi Arabia
for instance, sale of assets and receivables is of
course possible, but restrictions on the nature of the
purchaser make the task sometimes impossible. In
this Islamic-Shariah based legal system, form can be
totally disregarded by the court that can focus
exclusively on substance, and hence pierce any type
of legal or corporate veil.True sale can be re-
qualified. Except for Lebanon, most of the MENA
markets have not enacted trust or securitisation

72
been raised up to international standards by a blend
of IAS and Saudi GAAP (based on FASB).The
existing standards are FASB inspired, but other
accounting issues (not explicitly addressed) are to be
construed in line with IAS.The usage of such a
robust accounting base makes the sale of assets
easier, but at the same time brings confusion as to
which benchmark to take.With respect to the true
sale issue, it is unclear whether the de-recognition of
financial assets is risk/reward or control-based?
Needless to say that IAS internal contradiction (IAS
39 and SIC 12) has not been tested yet and the way
they will interact with FASB is still unknown.
Unstable tax environment
Another issue to address is tax related. In the
absence of adequate legislation, tax issues can erode
the economics of any securitisation transaction. In a
two-tier structure where the Owner SPV will have
to route funds to an offshore Issuer SPV, such funds
will be subject to withholding tax. Such tax can
sometimes be circumvented through structuring
techniques involving the Luxemburg Fiduciary Trust
or a Jersey-based specific vehicle.
Another issue is when, having enacted such
securitisation or fiduciary or trust laws, the
government fails to understand or to grasp the
substance of such concepts, and due to temporary
cash shortage (which is common in emerging
markets), modifies such laws in a way to levy taxes
on such vehicles.
Tax legislation is one of the most unstable areas
in the MENA region. Lebanon gives a good example
of such risks, as it has witnessed throughout the last
decade a swing in income tax, the introduction of
the VAT (without lowering the customs duties), and
the enactment of a tax-neutral fiduciary trust law in
1996, which was later subjected to double taxation
in 2003.
Absence of capital markets
Securitisation is not only about corporate finance,
but also about capital markets.The absence of capital
markets is yet another hurdle to overcome in the
MENA region. Much has been written on emerging
markets’ inability to develop capital markets.
According to experts, the most important reasons
for this failure are the lack of infrastructure of the
return measurement, and the lack of superstructure
of risk measurement.The infrastructure of the
return measurement is an application of the
transparency concept. It boils down to setting up a
public or a private institute dealing with collection,
processing and dissemination of legal, financial and
industry information on micro, meso and macro
economical levels.This critical breakthrough requires
only a slight modification in the existing laws and a
minimal capital allocation. It is a path that emerging
markets have not yet decided to take, especially due
to the role of transparency in uncovering
corruption.
Fana and Von Hayeck, the “architects” of the
information age, confirmed 20 years ago that
information is the raw material of market
economies.Accordingly,The European Community
allocated two directives (the 4th and the 13th
directives) to upgrade and harmonise information,
disclosure and transparency throughout Europe in
conjunction with the construction of the European
Union. No similar measure was ever attempted in
MENA.
In markets poorly covered and barely understood
by Rating Agencies, and in the absence of
transparent reliable affordable data, heavy investment
is required to establish independent and objective
risk measurement. Rating agencies have refused to
make such investment, arguing that the return on
such investment is more than hypothetical.The
solution to this seems to be another governmental
action setting up a “National Scale Rating.” This will
allow for rationalisation of risk costs and for building
trusted relationships between the investor and the
markets, allowing bank depositors to dis-
intermediate and convert unproductive deposits into
direct investments.
Capital markets cannot flourish without an
independent and scientific measurement of both risk
and return. Until then, banks will remain the
predominant structured paper investors in the
MENA region. Having banks as end-buyers of
structured paper distorts the disintermediation
process and dramatically narrows the spreads
available for both investors and originators.This
factor diminishes the attractiveness of EM
securitisation and seems to be a key factor in
understanding the shy move towards securitisation
in the MENA at times when the industry is
witnessing continuous stunning growth throughout
the world.
Sovereign ceiling
When dealing in emerging markets, one of the main
advantages of securitisation/structured finance is the
ability to breach the sovereign ceiling and hence
provide lower funding costs.
The cost of funds for healthy companies in
emerging markets, and more specifically, poorly rated
countries, is an issue.The rating agencies have
developed the theory whereby no company would
be allowed a higher rating than that of the country
in which it is operating.The concept, better known
as the sovereign ceiling, is based on the underlying
assumption that a sovereign default will force all

techniques allow breaching the ceiling and mitigating
emerging markets risks2
.The techniques can be
grouped under three main headings:3
(1) bypassing
techniques, (2) outlasting techniques and (3)
exemption techniques.
The bypassing techniques used by investment
bankers and securitisation specialists in their effort
to address sovereign risk issues are based on the
ability to capture hard currency outside the scope of
government intervention and beyond government’s
reach.These techniques are referred to as “bypassing
the exchange controls”.The first technique is Future
Flows. Many securitisations emanating from Turkey,
Brazil, Egypt and Mexico have achieved BBB (AAA
where a monoline insurance wrap has been
obtained), by capturing hard currency cash flows in
bank accounts located offshore.The Originator,
typically an exporter, assigns the receivables and
instructs its clients to settle their due in an offshore
account administered by a Trust.The only way a
government can affect such a structure is
consolidating the SPV with the Originator and then
considering any payments to the SPV as part of his
scope of intervention. It is worth noting that
sophisticated structuring techniques can address
such issues and avoid SPV consolidation.The
structure is not totally immune from country risks,
because it will always be limited to the Originators’
capacity to continue generating the needed
receivables.
Another technology often used in Future Flow
deals is the Supply Bonds.An insurer will cover
supply risk by paying the trustee if the Originator
fails to deliver the goods.Another technology used
in bypassing the exchange controls and country risks
is the swaps and guarantees that can be locked into
a structure and triggered in the event of forced
default or lack of access to foreign currency. In this
case the guarantor or the swap counterparty will
make hard currency payments to the SPV and will
be entitled to whatever funds are available in local
currency or onshore accounts. Currency swaps are
used to address the devaluation issues, as well as
transfer risk convertibility risks.A swap trigger
promising to pay abroad if sufficient local currency
funds are collected domestically will allow the cash
flow to bypass government controls.
Apart from the commercial insurers, two main
agencies underwrite emerging market risks: OPIC
(Overseas Private Investment Corporation), a US
government agency and MIGA (Multilateral
Investment Guarantee Agency), the World Bank
subsidiary. Rating agencies awarded insured
transactions with above sovereign rating (the MSF
deal in Brazil). It is worth noting that the deal will
73
domestic issuers or obligors to default, as the
sovereign will necessarily impose restrictive
measures impeding access to hard currency
necessary to service their obligations.This indicator
is very hard to measure in the absence of a
comprehensive intellectual framework or any
conclusive experience.This concept cannot be
synthesised and expressed using rating symbols due
to the lack of comparative methodology and
benchmarks. The sovereign ceiling theory has no
scientific grounding or justification known to us, nor
has it been demonstrated via a “débat contradictoire.”
It seems that this theory is more of a dogmatic
approach that provides an intellectual comfort for
rating agencies with limited time and resources to
deal with a variety of cultural models in business.
This theory also neglects any other trade model
than the one based on the written contract. It totally
neglects the binding effects of know-how, notoriety,
pledge and other social or cultural constraints
characterising non-western societies.
Such cultural issues are also found in some
industries in Europe, such as the diamond market in
Anvers. One might refer here to the works of David
Freidman, as detailed in his reference book Law’s
order. One can also point out that the sovereign
ceiling theory has been put aside by its own genitors
for specific political reasons. Some countries have
earned investment-grade rating while lacking the
basics of any investment-grade requirement. Other
countries like Japan and Korea, and lately even
Germany, officially objected the rating agencies’
discriminatory practices. In order to make up for the
above weaknesses, sovereign rating has been
promoted as the best proxy for the sovereign ceiling.
When dealing in emerging markets, one of the
main advantages of securitisation/structured finance
is the ability to breach the sovereign ceiling and
hence provide a lower cost of funding. Several
Figure 2: Sovereign ratings for some MENA
countries1
Country Moody’s Fitch Standard
Ratings & Poor’s
Bahrain Baa3 A- A-
Egypt Ba1 BB+ BB+
Israel A2 A- A-
Jordan Ba3 NA BB
Kuwait A2 AA- A+
Lebanon B2 B- B-
Oman Baa2 NA BBB
Qatar A3 NA A+
Saudi Arabia Baa3 NA A
UAE A2 NA NA

74
only reach a stand-alone rating level. Should the
structure collapse or the obligors default, OPIC and
MIGA will not be obligated to make payments.
Alternative structuring technology like the Bonex
structure existed and was able to lift a deal above
the Sovereign ceiling levels.
The investment banker can structure a deal in a
way to outlast the exchange controls. It consists of
providing access to foreign currency for the
expected duration of the exchange controls.Two
techniques are available here.The first is to fund an
offshore account with enough cash to outlast the
exchange control period.The funds should be
applied to satisfy the interest due to investors. But
how to determine the time frame for exchange
controls? This period, as set by rating agencies was
12 to 18 months before the Argentine crisis. It is
now 24 months.This technique has become a very
expensive mitigation tool.
The second option available to structuring banks
is the risk triggers, whose role is to legally increase
the weighted average life of the notes in order for
them to outlast the control period. During the
periods of exchange controls, all money is captured
in a GIC Account.The amounts are in hard or local
currency, and used to pay the Noteholders once the
controls are lifted. Combining both techniques (the
offshore accounts and the risk triggers) usually
proves quite efficient.
The exemption techniques refer to those
techniques involving players more powerful than the
Sovereign.The first most obvious one is the
structuring technique based on Preferred Creditor.
The underlying assumption being that the
government will default on all creditors except the
multilateral agencies (like the World Bank and its
subsidiaries).A transaction where the lender in
substance or even the Lender of record is a
multilateral agency can achieve above sovereign.
Experience proved that it is not systematically the
case and government seems to be able to default
even on those prominent players.Another
exemption technique involves a company within a
country with extensive powers due to historical or
industrial reasons.These companies have unlimited
access to hard currencies or are perceived by the
Sovereign as vital players, drivers of economical
growth. It is the case with PDVSA in Venezuela or to
a lesser extent with Solidere in Lebanon. Hence, it is
not in the best interest of the Sovereign to force
these companies to default even if the Sovereign is
itself in urgent need for hard currencies.The
foregoing is true, subject to local politics and
Emerging Markets Sovereigns sometimes do shoot
themselves in the foot.
Under pressure from investment bankers and
ever more innovative structures, rating agencies have
loosened their requirements and somewhat
undertaken a shift in their policy of proposing and
accepting solutions for breaching the sovereign
ceiling. In June 2001 Moody’s announced that
emerging market debt may not be constrained to
the country ceiling where (a) the creditworthiness
of the borrower is judged to be sufficiently high; and
(b) the likelihood of a general moratorium in the
event of a government default is sufficiently low; and
(c) where the Obligor has special access to foreign
exchange. Rating agencies have not yet dared
question the mainstream theory they have
contributed to putting in place.
What are the new opportunities?
Islamic finance
One of the main developments in emerging markets
is Islamic finance. Like all conventional banks, Islamic
banks are in the business of financing and asset
management. Some have indeed participated in
securitisation transactions.The definition of an
Islamic bank as provided by the Organization of
Islamic Conference (OIC) is as follows4
:“A financial
institution whose status, rules and procedures
expressly state its commitment to the principle of
Shariah and to the banning of the receipt and
payment of interest on any of its operations”
(Shariah being the economic, political, religious and
social order of Islam). Islamic banks started
operating in the early eighties at the national level in
Pakistan, followed by Iran and Sudan.To date, there
are more than 2675
Islamic financial institutions,
banks, insurance and reinsurance companies
operating in different countries, mainly in the GCC6
region.
Nonetheless, conventional banks of Western and
European countries (including Lebanon) started
taking advantage of Islamic banking techniques due
to the success of Islamic banking operations,
particularly using the fund in a profitable way
through asset finance or joint ventures. Moreover,
Islamic finance tends to relate finance to assets
which makes securitisation the perfect match for
Islamic institutions. Similarly, securitisation seems to
be an interesting opportunity for Islamic financial
institutions, due to the fact that it opens new liquid
markets, new classes of investors, a balance sheet
clean-up technology and fee-income earnings.
Applied to securitisation, the Shariah concepts
lead to certain differences between conventional and
Islamic transactions. For a securitisation to be
Islamic, it must ensure a two-level compliance: (i) the
underlying asset and (ii) the structure. Islamic

do allow for the capital owner to contribute capital
in kind (i.e. merchandise) provided that value is
mutually agreed at the time of the contract.The
agreed value becomes the capital of the Mudaraba.
Most of the Scholars who allow in kind
contributions, however, require the business of the
Mudaraba be the sale and purchase of the relevant
merchandise.
Musharaka is another (similar9
) mode of Islamic
finance, which is represented by two or more
financers who want to establish or participate in a
new project and are entitled to share the profits of
this project according to an agreed ratio.The losses
are shared in proportion to the capital contribution.
One influential Scholar within the Hanbali School
(the author of Al-Mughni, which is one of most
influential texts used in the Kingdom of Saudi
Arabia) considered that “if someone allows another
person to work his mule and receives a portion of
the profits arising from the mule, this would not be
a partnership and would not be a Mudaraba but
would be a structure close to the Muzaraa or the
Musacat.” Muzaraa and Musacat (or sharecropping)
are generally arrangements pursuant to which a
person allows another to plant his land or exploit
his farm and would receive a portion of the profits
arising from the land or the farm.Al-Mughni
defended this structure as a means of exploitation of
an asset and sharing of the profits produced.
In this context, a similar structure seems to have
been recently approved by the Fatwa Committee of
the Jordanian Islamic Bank. In effect, the Shariah
Committee of the Bank allowed (i) the purchase by
the Bank of refrigerated trucks for operation by the
Bank’s customer and (ii) the distribution of the
profits arising from the trucks’ operation (after the
payment of the capital to the Bank in full) in
accordance with a pre-agreed percentage.
Equipment securitisation (using leases or leased-
back underlying assets) is possible under the scheme
known as Ijara. Shariah compliant structures provide
for both Ijara (operating lease) and Ijara wa Iqtina
(financial lease)10
. Unlike conventional operating
lease, Ijara does not restrict the lessee’s right to
purchase the assets at anytime during or after the
lease term11
,Also there are no restrictions as to the
term of the Ijarra agreement.An Ijara agreement can
range from hours to years.The Iajara wa Iqtina has
certain advantages over other forms of direct
participation (Musharaka) mainly because of the
adequate protection of the investment and of the
tax advantages attached. It is yet unclear whether a
mismatching between the term of the Ijara and the
amortising life of the leased assets would lead to re-
qualifying the Ijara or the Ijara wa Iqtina.
75
institutions are concerned with the Islamic
acceptability of the asset classes; they tend to ensure
that the underlying assets are “Halal”.Alcohol,
tobacco or gambling, and other related assets are
prohibited, and will not be eligible underlying assets
in a Shariah compliant securitisation because they
generate non-Halal revenues. Mortgage-Backed
Securities are also not to be considered since they
are pools of interest-bearing assets.
For a securitisation transaction to be eligible,
having a Halal underlying asset is not enough.The
scheme linking the parties must in itself comply with
certain accepted principles.The parties’ relationships
must be governed by agreement which in substance
do not contradict the Shariah principles.This does
not imply that a Shariah compliant securitisation can
take only one form.Arrangers are not limited to one
rigid scheme that ties the Obligors, the Creditors
and the Assets. Nevertheless, the underlying
“scheme” should in substance match with one of the
accepted financing schemes.These are mainly
Murabaha, Mudaraba, Mucharaka and Ijara.
In inventory and trade finance securitisation
transactions, the underlying structure should be
construed in substance as a Murabaha contract, i.e. a
sale on a profit mark-up.The SPV would be
purchasing goods and selling them to clients at a
pre-agreed profit margin, rather than having a pool
of interest-bearing loans.To be in consonance with
the principles of Islamic finance governing exchange
transactions every Murabaha transaction must meet
the main following condition: Murabaha transactions
may be undertaken only where the client of a bank,
or financial institution, wants to purchase a
commodity.This type of transaction cannot be
effected in cases where the client wants to get funds
for a purpose other than purchasing a commodity,
like payment of salaries, settlement of bills or other
liabilities7
.
Another permissible scheme underlying an Islamic
securitisation transaction is the Mudaraba which
combines financial experience with business
experience, and where one party provides capital
and the other labour (the Mudareb is sometimes
referred to as the Trustee8
). Banks will then provide
capital and clients provide the expertise, and the
profit will be shared according to an agreed ratio.
Under a Mudaraba scheme, the SPV would be the
capital owner and contribute the capital whereas the
Originator/Servicer would be the Mudarib and
would provide its experience and services.The
majority of the Islamic Scholars require that in a
Mudaraba the capital owner contribute the capital in
cash. Certain Scholars, including certain Scholars
within the Hanbali School of Islamic Jurisprudence,

76
An issue still unresolved (one of many) is the one
related to options.We choose to address this specific
topic because of its fundamental role in emerging
markets securitisation. EM assets are usually local
currency denominated whereas issued paper appeals
to investors only if in hard currency.This inherent
mismatch requires embedding currency options,
forwards12
or swaps within a structure.Techniques
might be implemented using other accepted
concepts. Salam, for instance, is a sale transaction that
consists of the sale of a deferred commodity against
a present price. In other words, it is a Forward Trade
Transaction, which can be suitable for agriculture
operations. Istisna is another kind of sale where a
commodity is transacted before its existence; this
kind of transaction can be used to facilitate financing
in sectors like house financing, technology, aircraft
and ship building industries. It is unclear whether
these concepts might be applicable for currencies,
stocks and other marketable securities.Yet according
to a large majority of scholars13
, this is not
permissible on various grounds, the most important
being the element of risk and uncertainty (gharar)
and the possibility of speculation of a kind which is
not permissible. However, another ground for
rejecting such contracts may be riba prohibition. Bai
Salam in currencies with fluctuating exchange rates
can not be used to earn riba because of the presence
of currency risk. It is possible to demonstrate that
currency risk can be hedged or reduced to zero with
another forward contract transacted simultaneously.
And once risk is eliminated, the gain clearly would be
riba.This is a substance modification of the risk
patterns of the underlying assets which seems not
acceptable under Shariah.
Finally, from a risk/return perspective, the
investors in Islamic transactions are remunerated on
a profit and loss sharing basis, while a conventional
structure allows a debt issue with fixed return, with
or without a right of recourse to the issuer.
However, the successful application of securitisation
requires available credit and financial data on the
underlying asset, appropriate accounting standards
and the possibility of a rating process; these
conditions are not well satisfied in various Islamic
countries. Moreover, it is yet unclear to which
extent modification of risk/return patterns is
acceptable under Shariah.This puts a question mark
over all credit enhancement techniques usually
embedded in a securitisation deal, and more
specifically the tranching techniques.
The size of the Islamic market is said to be
US$100bn growing at a 17% rate per annum. GCC
banks (the GCC is where the main Islamic banking
activity is) dominate with a 71.44% of total capital
for top 100 MENA banks. Saudi banks have the
biggest share, followed by the UAE and Bahrain.
Among the non-GCC, Egypt leads with
US$4,201bn.14
Government securitisation and
privatisation
Another new area of activity is Government
securitisation and privatisation. Lebanon was the
first MENA country to enact a Government
Securitisation law.The 2002 enacted law N.430
allows the Central Bank of Lebanon to hold an
account for the management, servicing and
reduction of public debt.That way, it will receive the
proceeds of the country’s privatisation programme
over the next 20 years.
The Ministry of Finance is also authorised to
entrust the Central Bank with the structuring of
securitisation transactions; SPVs could then be
established by the Ministry of Finance and receive
the privatisation proceeds on a true sale basis, such
transfer being expressly immune against any freeze
order or set-off risk.We foresee a growth in
government securitisation transactions in the MENA
region, as more governments reform their
economies and look for efficient means to privatise
or securitise segments of their economies.
Notes:
1
Official web site of each Rating Agency as of
August 2003.
2
Emerging Market risks include: convertibility,
transfer, devaluation, expropriation, political
violence, freezes on deposits, as well as legal,
economic and environmental risks.The
aforementioned list is not exhaustive. It is
Figure 3: Geographical distribution per capital
GCC countries US$m
Bahrain 6,378
Kuwait 4,836
Oman 892
Qatar 1,750
Saudi Arabia 12,797
United Arab Emirates 7,396
Non-GCC countries US$m
Algeria 829
Egypt 4,201
Jordan 2,552
Lebanon 1,863
Libya 714
Morocco 1,871
Syria 730
Tunisia 851

deferred to a future date and hence, are similar
to futures in this sense.The latter however, are
standardised contacts and are traded on an
organised Futures Exchange while the former are
specific to the requirements of the buyer and
seller.
13
Mohammed Obaidullah, Financial Contracting in
Currency Markets:An Islamic Evaluation,
International Journal of Islamic Financial Services,
Volume 3, Number 3.
14
Arab Banking and Finance, 19th Edition, 2003-2004,
p. 25.
Author:
Iad H. Georges Boustany, General Manager
BSEC, Bemo Securitisation S.A.L
7th Floor
BEMO Building
Sassine Square
Achrafieh
Beirut
Lebanon
Tel: +961 1 200609
Fax: +961 1 200647
Email: contact@bemosecuritisation.com
77
nevertheless considered that the main emerging
market risk is the transfer/convertibility risk.
Addressing the other risks is out of the scope of
this article
3
See FitchRating research on Sovereign Rating and
Ceiling.
4
Nassiruddin Ahmed, Islamic Banking and its Mode
of Investments, Anthology of Islamic Banking, p. 307.
5
Nassiruddin Ahmed, Islamic Banking and its Mode
of Investments, op.cit. p. 308.
6
GCC, Gulf Cooperation Council, includes 6
countries: Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and United Arab Emirates.
7
Al Rajhi Bank: an in-depth insight in Islamic
Banking, http://www.alrajhibank.com.sa/instru-
murabaha.htm
8
Afzal Elahi, Leasing in Islam, op.cit. p. 315.
9
Farid Scoon, Musharakah and Mudarabah -
Towards Rationalisation, op.cit. p. 356.
10
Derek Weist, Issues in Islamic Leasing, op.cit. p.318.
11
Afzal Elahi, Leasing in Islam, op.cit. p.316.
12
Some Islamic scholars use the term forward to
connote a salam sale. However Mohammed
Obaidullah uses this term in the conventional
sense where the obligations of both parties are

MENA – GCC Securitisation
market review
Dr. Nasri Antoine Diab law firm
BSEC Bemo Securitisation SAL
This article first appeared in Global Securitisation and Structured Finance 2004,
published by Globe White Page Ltd, www.globalsecuritisation.com.

For the last couple of years, the MENA markets have been pushing for more
diversity in their financial activities. In that respect, securitisation has been a
significant agent and is experiencing notable growth that has already
materialised in markets like Egypt,Lebanon,the GCC countries and,very recently,
Saudi Arabia. We will, throughout this overview, focus on the opportunities
offered by this new approach for emerging economies, taking into account the
specificities of the targeted markets.Therefore,we will analyse the characteristics
of the relevant markets from an economic and regulatory stand. We will then
show how some other relevant factors have placed hurdles to the development
of those markets. Lastly, we will examine how securitisation can complement
Islamic Finance and the trends of government securitisation.
From an economic perspective
Investment banks, whether international or regional, have constantly tried to
offer the same range of products they offer in developed countries to
companies in the MENA – GCC regions. This global but also simplified
approach to corporate finance has yet to succeed. In our opinion, the main
reason for such failure is that this approach ignores the opportunities offered
by the status of a typical regional company’s balance sheet. Therefore, the
size, the customers’ growing assets and the structure (family owned) of a
majority of those companies were not in most cases taken into account in
order to offer tailored products that would reasonably match the needs of
these companies and compete with services offered by the banking sector.
The investment banking community has never taken the time and allocated
the resources required to understand the needs and specificities of emerging
markets. This lack of interest can be explained and better understood if one
was to look at the numbers: the cost of required resources far outweighs
expected returns. Investment banks have therefore offered equity and debt
products where asset based solutions were needed.
MENA – GCC Securitisation market review
Dr Nasri Antoine Diab – Dr. Nasri Antoine Diab law firm
Iad Georges Boustany, Elias Sayegh – BSEC Bemo Securitisation SAL.
© N.A. Diab and BSEC Bemo
Securitisation SAL 2004
N.A. Diab and BSEC Bemo Securitisation SAL 1

2 N.A. Diab and BSEC Bemo Securitisation SAL
MENA – GCC Securitisation market review I N.A. Diab and BSEC Bemo Securitisation SAL
Regulatory framework
The evolution of securitisation has already showed that it
is possible to structure such operations in markets where
no specific regulations exist Although a defined legal
framework would aid better understanding of the concept
and avoid the risks associated with legal uncertainties,
most of the countries in the MENA – GCC regions have
still to enact such regulations. For the purpose of better
addressing this issue, we will first address the countries
that have enacted such regulation or are on the verge of
doing so. We will then analyse how securitisation would
apply in some countries of the MENA – GCC region that
have not yet envisaged such a possibility and the main
hurdles for the use of such financial structure.
Status of securitisations regulations in the region
Several countries have addressed the securitisation
issue in a formal way. In this respect, Turkey has already
issued a regulation as early as in year 1992 treating
the subject from the sole aspect of asset-backed
securitisation. Other types of securitisations (eg
mortgage-backed securitisation) are not specifically
addressed by this regulation although the evolution of the
legal framework and its flexibility permit securitisation to
be a very popular product in the Turkish economy and to
be broadly used by banks to reshape their balance sheets.
Tunisia has done the same by including the concept of
securitisation in its plan to reshape the banking sector. The
trend was also confirmed with the adoption of Law N.
2001-83 dated July 24, 2001, addressing many of the
issues related to funds but also creating a new entity in the
Tunisian legal framework, the ‘fonds commun de créances’.
This structure mirrors the legal situation of securitisation in
France and is an adaptable structure for such transactions.
As for Lebanon, the government has been studying
comprehensive draft law for more than two years now.
Nevertheless, Lebanon offers an adequate framework for
structured finance operations: It has already enacted a
Fiduciary Trust Law N. 520 dated June 6, 1996, dealing
with “Financial Markets Development and Fiduciary
Contracts”. In addition, the Lebanese legal framework
offers flexible opportunities for the transfer of assets or
receivables pursuant to Article 280 of ‘Code des
Obligations et des Contrats’.This article states clearly that
assignability of assets is the rule and restriction is the
exception.The setting up of an SPV is made relatively easy
with the possibility of choosing between a company with
variable capital, a community, or a fiduciary.
Egypt, which has been reserved in addressing the
subject, has included a securitisation provision in regulation
dealing with real estate. Egypt still has to enact a broader
and more comprehensive law addressing the issue,
although some transactions have already closed
(securitisation of credit card receivables for example). It is
also interesting to mention that the absence of such a
precise and predetermined setting for securitisation has not
been a hurdle for securitisation transactions, a number of
which has already closed in some MENA – GCC countries.
Shariaa based systems
Taking Saudi Arabia and all other Shariaa based systems as
an example, experience has shown some stringent
restrictions and uncertainties at many levels. Although
transfer of assets or receivables is allowed, some
restrictions apply as to the nature of the purchaser. Also,
courts apply Shariaa in their decision-making process.
Shariaa is itself divided in different schools. Although the
Hanbali school is dominant in Saudi Arabia, the judge can
decide to choose another school and to focus exclusively
on substance, ignoring what was created in form (a
necessity in structured finance). This brings great
uncertainty to the cornerstone of a securitisation
transaction: the concept of true sale. The possibility of
requalifying a true sale and of piercing the legal and
corporate veil makes any investor very wary before taking
such a risk. Another problem faced in Saudi Arabia and in
some other countries in the area are the very strict laws on
foreign ownership. Those handicaps bring us to the
conclusion that one of the best ways to structure a
securitisation transaction in such an environment would
be through a two-tier structure with both an SPV in the
country of origination (the owner SPV), and one in a
foreign country, (issuer SPV), with adaptable legislation
(Jersey, Luxembourg). It is necessary to mention that it is
not possible to create an SPV as a subsidiary of the
originator since it would expose the owner SPV (the local
one) to consolidation risk and would remain under the
control of the originating entity. Those two risks defy the
very essence of a securitisation transaction.
Other relevant factors
In addition to those mentioned above, there are a number
of other factors to be considered in any market for
securitisation. In the MENA – GCC region these factors are
also hurdles at this very early stage of the evolution of
regional structured finance

N.A. Diab and BSEC Bemo Securitisation SAL I MENA – GCC Securitisation market review
Absence of capital markets and
lack of experience of main players
Capital market efficiency is measured by many
parameters. The regional markets lack some basic
parameters. Thus, there is both a lack of infrastructure for
accurate return and, a lack of superstructure of risk
measurement. Simply stated, and in a market ignored by
the Rating agencies, there is a real problem with
information collection, transparency, processing,
disseminating and analysis. This is a direct result of poor
harmonisation of the available data, not only on a regional
level but also within the same country where the reporting
requirements and levels of disclosure are rarely to be
counted on. This is a major handicap when we know the
importance of information and its analysis. In building the
financial markets of the European Union, commissions
have understood very early how important that issue is
and have consequently addressed it at the highest levels in
the 4th and the 13th Directives.
In the rare cases where the above handicaps can be
overcome, some additional factors come into play. First, on
the investors’ level, there is real hesitation to engage in
what still seems to be an exotic financial instrument. This
is a result of the lack of experience but also in the case of
banks, of the fear of competition. With the boundaries of
commercial banking and investment banking yet to be
defined and, more importantly, to be clearly understood by
the players in the region, the market will experience
disruptions that will impede its natural evolution.
Secondly, the stagnation of financial activities has
affected the private sector and companies that would be
viewed as potential clients for a securitisation transaction
in that it has made them so dependent on traditional
banking and on their relation with those banks that they
would not jeopardise it for a financing alternative that
they are still not familiar enough with, even if it would
offer a better cost of funds.
The choice of securitisation often comes at a moment
where a company has exhausted other alternatives. This is
obviously not the best time for a securitisation transaction
to be structured. On the other hand, once the
securitisation structure is in place, the trustees probably
have the most important role in making sure that the
mechanism created by the structure is working well.
Therefore, their role is a prominent one and cannot be
ignored. In order to accomplish the tasks delegated to
them, these firms, or in some cases these individuals, must
understand and exercise their role to the fullest extent.
This requires experience and investments. The shortage of
such experience in the region can however be addressed
by delegating these specific tasks to foreign trustees and
leaving very little to the discretion of locals (although
some tasks have to be accomplished by locals as required
by law).
Even if all those issues are addressed, the absence of
rating agencies intervention and of understandable and
regular data remains a hurdle in developing the markets.
Last but not least, it is crucial to mention that in developed
markets, private players interact with regulatory bodies
that play a pivotal role in defining tasks, requirements,
flow of information, quality of investors and other crucial
duties. In order to accomplish the above mentioned duties,
these regulatory bodies must be at least as competent as
the most sophisticated players. The learning process is a
self-feeding one where new initiatives build knowledge for
all interacting parties. The scarcity of such initiatives and
transactions in the MENA – GCC region dilutes the
knowledge base of the regional public and private players
Accounting
Beyond the absence of harmonisation of the standards
used throughout the region, which already makes
the data eventually available hard to understand, the
implementation of International Accounting Standards
(IAS) raises another problem. These standards (IAS or
other) are the result of a lengthy nurture process
stemming from back and forth trial and error actions in
very sophisticated markets. Standards have been put to
the test and improved on numerous occasions. They grew
in sophistication along with the markets. This is a major
difference with MENA – GCC where these standards have
been imported in their most refined/sophisticated version.
Thus, instead of starting to evolve in a rather flexible
market, regional markets have to evolve with complicated
accounting standards that developed markets did not
experience while growing their business. This creates an
additional hurdle for innovative financial instruments.
MENA hot topics
Government use of securitisation
As a result of the growth of securitisation in the developed
markets, regional governments have considered using this
financial tool as a means to boost their economies.
Therefore, some of the countries have looked at
securitisation as a method that would help reduce public
debt. Lebanon is one of these countries and the first in the

MENA – GCC Securitisation market review I N.A. Diab and BSEC Bemo Securitisation SAL
MENA – GCC to have enacted a government securitisation
legislation (Law N.430 of year 2002). It has planned for the
Lebanese government to receive the proceeds of
privatisation programs that will eventually take place over
the next 20 years. But although securitisation is a
considerably important tool to use in governments’
economic policy, it is a tool to use very carefully.
The downside of the use of securitisation transactions
in government operations is that some strict requirements
have to be met in order not to put at risk the very
qualification of the transaction.Therefore, and in reference
to the standards set by the European System of Accounts
(ESA 95), there is a risk that a securitisation transaction be
treated as a government borrowing. This would happen in
cases where a government is securitising future flows. The
very purpose of securitisation would be jeopardised in that
a government borrowing would have embedded in it risks
that are different from those of the securitised assets, and
the investors would want to be aware of those risks. Also,
guarantees given by the government jeopardise the
qualification of securitisation since it could be deemed
that no complete transfer of risks and rewards has been
operated by the government which would have to support
the structure in case of failure. Thus, this scheme is also
considered as government borrowing. Finally, there is a
number of guidelines that a government will need to
follow in order to make sure the transaction will not be
requalified. Thus, securitisation is not the easy and simple
solution to governments’ economic problems as some
have tried to represent.
Islamic finance
Islamic finance materialises in the perusal of the teaching
and orientation of Shariaa principles in the finance industry
and more specifically, for the scope of our analysis, for
securitisation purposes.The major aspect of Islamic finance
is the adherence to Halal activities meaning activities that
are allowed under the Shariaa. It is usually a Shariaa board
or in some cases a single recognised scholar that issues a
Fatwa confirming the compliance of a securitisation
transaction with the guidelines.
Shariaa has traditionally linked finance to assets per se
and to the risks inherent to those assets.Thus, knowing the
importance of this very similar approach for a
securitisation transaction as well, a very quick link was
made in order to help develop both markets in parallel.
This evolution is yet to be experienced since most
securitisation operations are now being done in markets
where Islamic finance has not yet reached full potential,
while most the of Islamic banking community and
activities are taking place in the Muslim world. There is
some level of mismatching in the products offered and the
needs of the markets. European and US investment banks
are trying to address this new market by creating a new
approach to regional needs that would be in line with
Islamic finance principles; this mismatching could ideally
be addressed by developing regional know-how in
securitisation structuring.
Compliance of a securitisation transaction with the
Shariaa has to be verified on two levels. First, the assets to
be securitised must be assets that are eligible. Therefore,
revenues deriving from any activities related to gambling,
alcohol, or any non permitted activities are not eligible to
be securitised under Islamic Shariaa. On a second level, the
securitisation structure has to be declared compliant with
Islamic principles. This can fall under the ethical
investment asset class.
The ultimate result of a transaction that would be
declared Shariaa compliant could be the issuance of Sukuk,
which is the Islamic name given to hybrid bonds. Within a
securitisation transaction and as a result of the linkage
with the ownership of assets, an important distinction
could be made for instance between Ijara Sukuk and
Investment Sukuk. This example would help understand
how some ownership elements would affect a
contemplated transaction under Shariaa principles. As an
example of Ijara, we can mention financial and operational
leases. Although financial leasing operations per se are
allowed by Shariaa, securitisation of a pool of financial
leases would not obtain Shariaa approval because
investors would not be considered as taking the risks and
rewards of the physical assets. Thus, such a transaction
would not be permitted, unless the asset being leased is
acquired or the usufruct of this asset is transferred. This
brings us to the definition of the investment Sukuk as it is
given by the Accounting and Auditing Organization for
Islamic Financial Institution, Shariaa Standard No.17:
“Investment sukuk are certificates of equal value
representing undivided shares in ownership of tangible
assets, usufruct and services or (in the ownership of) the
assets of particular projects or special investment activity,
however, this is true after receipt of the value of the sukuk,
the closing of subscription and the employment of funds
received for the purpose for which the sukuk were issued”.
This is a broader aspect of Sukuk and allows for easier
application of securitisation. The definition of Investment

N.A. Diab and BSEC Bemo Securitisation SAL I MENA – GCC Securitisation market review
Sukuk has elements of the definition of ownership
embedded in it. Therefore, it allows for dismemberment
of ownership and would for example allow for a
securitisation resulting in a usufruct right over the
securitised assets. The creation of such a right would only
materialise after Sukuk issuance and subscription.

Contributor profiles I N.A. Diab and BSEC Bemo Securitisation SAL
Beirut, Lebanon
Tel +961 1 901 316 or 961 1 901 317
Dr. Nasri Antoine Diab
Email undroit@dm.net.lb
Dr. Nasri Antoine Diab graduated with an LLM from
Georgetown University and has also obtained a Post-
Graduate in Business Administration (Solvay – Brussels)
and a PhD. Law from the University of Paris 2. He is a
Law Professor at the Faculty of Law and Political Sciences
at Saint-Joseph University (Beirut); lawyer at the Beirut
Bar; member of the Ministry of Justice’s Committee of
Legislative Modernization; member of the Lebanese Banks
Association’s Legal Committee as well as a member of
the Energy Institute (London). He is also the author
of four books including ‘La Tritrisation des Actifs’
published in 2003 at LGDJ-Bruylant (Paris-Brussels)
with I. Boustany.
BSEC – Bemo Securitisation SAL
7th floor, BEMO building, Sassine Square,
Ashrafieh, Beirut, Lebanon
Tel +961 1 200609 Fax +961 1 200647
Web www.bemosecuritisation.com
Iad H. Georges Boustany
General Manager, Executive VP - Structured Finance
Email iboustany@bemosecuritisation.com
Iad Boustany is the General Manager at BSEC - Bemo
Securitisation SAL, and the Executive VP of the
Structured Finance desk. He has extensive experience in
the structured finance/securitisation arena spread over a
variety of jurisdictions such as France, Luxemburg,
Lebanon, Jersey and Saudi Arabia. Among the more
noteworthy ‘firsts’ he has been responsible for are (i) the
first Shariaa compliant securitisation (Saudi Arabia); (ii)
the first Saudi Arabian true sale securitisation; (iii) the
first inventory securitisation on vehicle fleet; (iv) the first
term securitisation in Lebanon; (v) the first SIV in
Lebanon; (vi) credit scoring models for corporate and
consumer credit in non-transparent economies. He holds
a Masters degree in Structured Finance (ESCP - Ecole
Supérieure de Commerce de Paris), a BA in Applied
Mathematics (Université Paris X). He is a lecturer at
Saint-Joseph University, School of Management
(Undergraduate and Graduate programs) and lecturer in
the MBA delivered by Université Paris IX Dauphine
(France) with Saint-Joseph University (Lebanon) He is the
author of ‘La Titrisation des Actifs’, LGDJ/Bruylant, Paris
and Brussels, 2003 (with N. Diab), the first securitisation
book focusing on emerging markets’ securitisation.
Elias Sayegh
Associate – Structured Finance
Email esayegh@bemosecuritisation.com
Elias Sayegh is an associate at Bemo Securitisation. He
graduated with a LLB in French and Lebanese Law and a
B.A in Political Science from St. Joseph University, Beirut,
Lebanon. He also holds an LLM in Banking and Financial
Law from Boston University School of Law. He worked for
a leading local law firm before joining the BSEC team.

Beirut, Lebanon
Tel +961 1 901 316 or 961 1 901 317
BSEC – Bemo Securitisation SAL
www.bemosecuritisation.com
7th floor, BEMO building, Sassine Square, Ashrafieh, Beirut, Lebanon
Tel +961 1 200609 Fax +961 1 200647

2 0 0 4 / 2 0 0 5
Global Securitisation Review

Contents
Structured finance in the emerging markets 1
International Finance Corporation (IFC),TheWorld Bank Group
European Securitisation Forum plays pivotal role in explosive growth of securitisation 9
European Securitisation Forum
An overview of securitisation in Asia 15
Asian Securitization Forum
Australian securitisation update and outlook 18
Australian Securitisation Forum
Trustees and administrative service providers: adding value to the structured finance markets 24
Deutsche Bank,Trust & Securities Services
Coming to terms with extendible notes 28
Global Securitization Services, LLC
Are there potential housing bubbles and will they burst? 33
Bear, Stearns International Ltd.
What to look for in CDO analytical tools 42
Wall Street Analytics
Recent changes in securitisation surveillance data and technology 47
LewtanTechnologies
Islamic and conventional securitisation: challenges and opportunities for SMEs 53
BSEC- Bemo Securitisation SAL
IAS 39: Understanding your market for securitisation better 59
KPMG LLP
A review of the European CMBS Market 63
Eurohypo Investment Banking

Securitisation in Europe: a director’s perspective 70
SPV Management Limited
The role of the credit enhancer in Europe 74
MBIA
Securitisation activities in the Nordic countries 79
Nordea
Conduit facilities: warehousing a new role for European conduits? 83
Danske Bank
The European RMBS safe haven 90
Deutsche Bank
Role of the search consultant: stability returns to the market 97
RJF Global Search
The review of the European ABCP market: the growth of a rising star or Icarus flight? 102
BNP Paribas
The UK covered bond is off to a flying start - but will its wings be clipped? 108
Clifford Chance LLP
Securitisation - the Scottish perspective 111
Tods Murray LLP
Overview of the French securitisation market: review of the current changes in the legal
and regulatory framework 114
Orrick, Herrington & Sutcliffe
Italian SME transactions 119
Euro Capital Structures - Unicredit Banca Mobiliare
New opportunities offered by the Italian corporate law reform for securitisation transactions 122
Gianni, Origoni, Grippo & Partners
Contents

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