Limassol, April 19, 2021 -- Moody's Investors Service ("Moody's") has today
assigned first time issuer ratings to Saudi Real Estate Refinance Company
(SRC) of A2/P-1. At the same time, the rating agency
assigned Aa2.sa/SA-1 national scale issuer ratings for SRC.
The outlook assigned to SRC is negative, in line with the negative
outlook assigned to the government of Saudi Arabia's issuer rating
(A1 negative), the support provider.
The Saudi Real Estate Refinance Company was established in 2017 to develop
the Saudi housing finance market by enabling originators to offer home
buyers long-term and short-term financing solutions.
SRC is solely owned by the Saudi government through the Public Investment
Fund (PIF, Saudi sovereign wealth fund) and is licensed to operate
in the secondary real estate market by the Saudi Central Bank, formerly
known as Saudi Arabian Monetary Authority (SAMA).
Moody's regards SRC as a government-related issuer (GRI)
and applies the Government-Related Issuers Methodology to arrive
at the company's issuer ratings and the Finance Companies Methodology
to arrive at SRC's standalone BCA.
The A2 long-term issuer ratings assigned to SRC are four notches
above its baa3 Baseline Credit Assessment (BCA), reflecting Moody's
expectation of high probability of government support based on SRC's
100% government ownership and its important policy mandate of increasing
home ownership among Saudi nationals. The credit support mechanism
the company has from the government which guarantees certain sukuk issuances,
is also a key factor in Moody's expectation of high probability
of support as it signifies the importance of SRC and the role it plays
for the Saudi government. SRC's baa3 BCA reflects the company's
solid asset quality and strong capitalisation which are moderated by a
still evolving profitability profile, high reliance on wholesale
funding, concentrated exposure to the relatively new mortgage market
in Saudi Arabia and low levels of liquidity.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
RATIONALE FOR BCA
SOLID ASSET QUALITY MODERATED BY RAPID GROWTH AND PRODUCT CONCENTRATION
Moody's expects SRC to maintain solid asset quality, supported
by the resilient performance of the mortgage market in Saudi. The
company's non-performing financing remains low at 0.3%
as at September 2020. SRC acquires home finance contracts (mortgages)
from finance companies and banks in Saudi Arabia through its purchase
without recourse (PWOR) mechanism. Through this mechanism,
SRC assumes the credit risk of the borrower with the property contract
assigned to SRC. The bank or the finance company acts as the servicing
agent for SRC and continues to automatically deduct the monthly instalments
from clients' accounts. Most of the home finance borrowers
in Saudi Arabia are government employees where job stability is fairly
high and hence the agency expects the performance of the market to be
resilient despite the impact of the pandemic on the operating environment.
SRC's other credit exposure comes from its short-term funding
facilities extended to finance companies. These facilities enable
finance companies to originate new home finance contracts which can also
be acquired by SRC following the conclusion of a minimum seasoning period.
The company has set concentration limits for these facilities linked to
the finance companies' risk classification.
SRC's solid asset quality is moderated by the company's product
concentration and rapid growth which exceeded 60% annually on average
since its inception in 2017. The company's activity is largely
reliant on the performance of a single product, this being mortgages.
In addition, given it is a relatively new company starting from
a low base, Moody's expects the growth in assets going forward
to remain very high which may put the company's operational and
risk capacity under pressure.
STRONG ALBEIT MODERATING CAPITALISATION
SRC's capitalisation is strong with a tangible common equity / tangible
managed assets ratio of 24% as at September 2020. The company
has secure access to capital through the public investment fund (PIF,
sole shareholder and sovereign wealth fund of Saudi) which has plans to
increase the company's capitalisation more than threefold from its
current SAR 1.5 billion paid up capital. However,
despite the current strong capitalisation and the plan to increase paid
up capital, Moody's expects that the company's aggressive
asset growth plans will moderate capitalisation as it builds up its portfolio.
Nonetheless, the agency still expects the company's capitalisation
to remain strong and further supported by a strong shareholder in case
of a need.
PROFITABILITY STILL WEAK BUT SET TO IMPROVE
SRC moved into profitability in the first nine months of 2020, as
measured by its net income / average managed assets of 0.4%,
compared to a loss of 1.0% as at December 2019. The
company's financial performance benefited from the significant increase
in its financing portfolio which jumped to about SAR 6 billion as at September
2020 up from SAR 2.2 billion in December 2019. Whilst the
company's weak profitability largely reflects its new franchise,
Moody's expect SRC's earning power to improve and stabilise
as it increases its leverage.
SRC has an efficient cost structure since they do not require branches
to conduct business and their single line of business requires less operational
investment. Despite the agency's expectation of continued
increase in operating expenses resulting from SRC's ongoing franchise
build up, Moody's anticipates that the improvement in earning
power will lead to further improvement in the company's cost to
income ratio, which stood at 77% as at September 2020 compared
to 168% in December 2019.
SRC's current healthy profit margin of 3.3% (analogous
to the net interest margin) as at September 2020 is largely due to the
company's low leverage and the utilisation of short-term
banking facilities and capital to fund its asset acquisition. Moody's
however expects this margin to come under severe pressure as the company
increases its leverage and start matching the asset duration through long-term
funding.
FUNDING AND LIQUIDITY RISKS PRESSURE SRC'S FINANCIAL PROFILE
As a non-depository institution, SRC relies solely on confidence-sensitive
sukuk and short-term facilities for funding. The company
also maintains low liquidity, as the proportion of liquid assets
to total assets was only 1% as of September 2020. The risk
of SRC's current funding and liquidity profile is further exacerbated
by the lack of track record of adequate management of the company's
asset and liability mismatch due to its fairly short history.
Reliance on wholesale funding and low liquidity levels are risks common
to the majority of the mortgages refinance companies and are not specific
to SRC. To partially mitigate the risk, the company has adequate
committed liquidity facilities in place from highly rated banks which
it mostly uses to bridge the financing gap between the time it facilitates
the acquisition of a portfolio and the time its matches the funding duration
through the long term sukuk issuances. SRC has also credit support
mechanism from the government whereby the latter will provide an unconditional
and irrevocable guarantee for specific issuances by SRC which will reduce
funding costs and ease market access.
RATIONALE FOR LONG-TERM ISSUER RATING
SRC's A2 long-term issuer rating incorporates four notches of uplift
from its baa3 BCA. This is based on Moody's assessment of a high
probability of support from the government in case of need, which
reflects (1) the government's strong capacity to support,
(2) SRC's important policy role of increasing home ownership among Saudi
nationals, (3) SRC's 100% government ownership through
PIF (4) past evidence of systemic support in the system, and (5)
the credit support mechanism from the government also signifies the importance
of SRC for the Saudi government and is a key factor in assigning high
probability of support.
OPERATING ENVIRONMENT
Moody's assigns a Baa2 Operating Environment score to SRC,
which incorporates a Macro-Level Indicator score of A3 and an Industry
Risk score of Baa. The Macro-Level Indicator score of A3
reflects Saudi's large size economy, high per-capita income
and large hydrocarbon endowment. The score also reflects the country's
strong policy credibility and improved performance in government effectiveness
and control of corruption. Persistent regional geopolitical tensions
moderate Saudi's Macro-Level Indicator score. The
Industry Risk score of Baa reflects the stability of the mortgage market,
which is underpinned by steady employment levels, effective regulatory
oversight by the central bank and the prudent underwriting standards among
banks and finance companies, as well as the high barriers to entry.
Ongoing initiatives by the government to boost homeownership will also
help drive long-term growth in the mortgage market.
ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS
The global finance companies sector has been classified as "Low"
risk in our E heatmap [1]. In line with our general view for
finance companies, SRC has a low exposure to environmental risks.
However, given the sizeable contribution of the hydrocarbon industry
to the economy, SRC's indirect exposure to the hydrocarbon
sector may increase its vulnerability to environmental risks. The
finance companies sector has been classified as "Moderate"
risk in our S heatmap [2]. The most relevant social risks
for finance companies arise from the way they interact with their customers.
Social risks are particularly high in the area of data security and customer
privacy which is partly mitigated by sizeable technology investments and
long track record of handling sensitive client data. Governance
is highly relevant for SRC, as it is to all participants in the
finance industry. Corporate governance weaknesses can lead to a
deterioration in a company's credit quality, while governance
strengths can benefit its credit profile.
RATIONALE FOR NATIONAL SCALE RATING
SRC's Aa2.sa/SA-1 national scale issuer ratings are
underpinned by the company's global scale long-term issuer rating
of A2, which in turn reflects a standalone BCA of baa3 and four
notches of government support uplift. The Aa2.sa is the
higher of two NSR categories corresponding to SRC's global scale issuer
rating.
NEGATIVE OUTLOOK
The negative outlook on SRC mirrors the negative outlook on the Saudi
Government's issuer rating, the support provider.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the Negative outlook, there is no upward pressure on SRC's
issuer ratings. Moody's may stabilise the issuer ratings if the
outlook on the support provider was changed to stable from negative,
and the company's financial profile remains robust.
Downward pressure on the SRC's issuer ratings could materialise
if (1) Moody's downgrades the Saudi government's sovereign rating;
(2) severe losses on SRC's mortgage portfolio erode a significant
portion of its capital; and/or (3) the company could not adequately
manage its asset and liability mismatch leading to heightened liquidity
and market risks.
LIST OF AFFECTED RATINGS
..Issuer: Saudi Real Estate Refinance Company
Assignments:
....Long-term Issuer Ratings,
Assigned A2
....Short-term Issuer Ratings,
Assigned P-1
....NSR Short-term Issuer Ratings,
Assigned SA-1
.... NSR Long-term Issuer Ratings,
Assigned Aa2.sa
Outlook Actions:
....Outlook, Assigned Negative
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Government-Related
Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207,
and Finance Companies Methodology published in November 2019 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
The local market analyst for this rating is Ashraf Madani, +971
(423) 795-42.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] https://www.moodys.com/research/-PBC_1135665
[2] https://www.moodys.com/research/-PBC_1132742
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Christos Theofilou, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
