Credito's public offering marks new era in Israeli securitisation industry

Israel is on the brink of a major milestone in its financial sector with the launch of its first public RMBS deal. The groundbreaking deal led by the Israeli non-bank lender Credito represents a major step forward for the country’s securitisation market, traditionally dominated by private and bilateral transactions.

The Credito IPOs RMBS deal consists of a mortgage portfolio of approximately ILS 549m (€134.7m) as of 10 April, secured by residential properties in Israel. It is being heralded as the first public RMBS securitisation in the country, a fact confirmed by the preliminary rating report from S&P Maalot, issued in July.

"This deal is set to be a landmark for the Israeli market,” says Jason Smilovitz, an Israel-based independent senior securitisation consultant. “It is exciting to see a public securitisation issuance come to fruition, marking a shift from the usual private, bilateral transactions."

Historically, Israeli securitisation has largely been confined to private deals, where banks and non-bank lenders have engaged in bilateral transactions to sell off portfolios of loans. These deals have typically used various approaches, including true sales and synthetic risk transfers, often involving structures like credit-linked notes (CLNs) and credit risk transfers (CRTs).

Smilovitz notes: "While synthetic transactions have been utilised primarily for capital relief, the introduction of a true securitisation framework would be a game-changer."

Regulatory landscape and future prospects
The development of a formal securitisation regulatory framework in Israel has been a long-term goal. Efforts to finalise this framework and present it to the Knesset, the unicameral legislature of Israel, have been ongoing for over a decade. However, recent geopolitical tensions and other pressing issues have delayed progress. According to Smilovitz, there was hope for the securitisation law to be enacted by the end of 2024, but current circumstances suggest it may be pushed into 2025.

Despite these delays, there is strong interest from market participants. The Israeli government and regulators, including Amir Yaron, Governor of the Bank of Israel, have expressed support for securitisation as a key step in the evolution of the financial market.

"The regulators are supportive of this deal and of securitisation in general," says Smilovitz. "When the law is finally passed, I expect a surge in activity as market players will rush to bring new and innovative transactions to market."

Comparative insights and market reactions
In terms of structure, Credito IPOs follows a similar model to the non-profit Ogen Group's listed securitisation, which Smilovitz previously worked on. Ogen’s deal involved SME loans and was also listed on the Tel Aviv Stock Exchange, focusing on institutional investors. However, Smilovitz highlights a crucial distinction: "The Credito deal is noteworthy not just for its public offering for retail investors, but also for its alignment with international practices."

Local and international investors are closely watching this development. While Israeli investors are expected to engage with this new product, foreign investors will assess how it fits into their mandates. Smilovitz notes: "There is significant interest in Israeli financial products, but for foreign investors, the alignment with international standards will be crucial."

S&P provides additional insights into how this RMBS transaction compares to similar deals rated in other regions. Alejandro Marcilla, associate director, explains that this transaction required particular assumptions tailored to the Israeli market. "We focused on some of the main characteristics of the market with regard to mortgage origination and policies, considering the role of the regulator within our assumptions. The originator, in this case, is focused on all-purpose mortgages – a specific loan product within the Israeli market. This has been captured within our analysis."

He adds: “Compared to other jurisdictions, this originator, in line with local regulation, maintains a strict LTV ratio and debt-to-income considerations, which were integral to our evaluation. From a customer perspective, these aspects are more or less comparable to what we generally see in other regions.”

Geopolitical factors and long-term impact
Geopolitical factors present an additional layer of uncertainty. Israel’s sovereign credit rating, which has faced recent downgrades, could influence the performance of the Credito’s RMBS deal. Smilovitz warns: "Geopolitical instability could affect Israel’s sovereign rating, which in turn would impact the ratings of local investment products. Nonetheless, there is no expectation that this poses a challenge to the deal’s closing."

While the regulatory framework remains under development and geopolitical uncertainties loom, the deal is a positive step towards a more robust and dynamic securitisation market in Israel. Smilovitz optimistically adds: "When this deal closes as expected, it will set a strong precedent and pave the way for more public securitisations in the future."

S&P also highlights the risks associated with the Israeli RMBS market, noting that the current environment necessitates consideration. "Stresses are higher than they would otherwise be given to ongoing geopolitical conflict," explains Marcilla.

Alastair Bigley, md and sector lead for European RMBS at S&P Global, adds: “Although Israel’s sovereign and banking system ratings remain relatively high, there are geopolitical risks which, if they become significantly prolonged, may crystallise into macro-economic risks. These, in turn, could impact asset, sovereign and counterparty credit-worthiness and impact RMBS ratings. Such risks are innate within RMBS ratings in other jurisdictions, but are clearly more front and centre in the current case of Israel."

Looking forward, S&P predicts that the Israeli RMBS market could see significant growth. "There has been considerable interest from banks, advisory firms and non-banks in issuing RMBS paper,” says Bigley. “Many non-banks originate niche products, so esoteric collaterals might also become a trend to watch." Smilovitz echoes this optimism, stating: "If this deal closes as expected, it will set a strong precedent and pave the way for more public securitisations in the future."

Selvaggia Cataldi