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Bloomberg – Saudi Arabia Raises $17.5 Billion in Record Sovereign Bond Sale

 

161019-bloomberg-saudi-bond-sale-copyBy: Arif Sharif, Archana Narayanan, Lyubov Pronina

October 19, 2016 — 11:43 AM BST Updated on October 20, 2016 — 4:54 AM BST

Does Saudi Bond Sale Reflect Deepening Strain?

Kingdom to use proceeds to bridge its budget shortfall

Debut bond offering received orders of about $67 billion

Saudi Arabia raised $17.5 billion in the biggest ever bond sale from an emerging-market nation as it seeks to shore up finances battered by the slide in oil.

The government sold dollar-denominated bonds due in five years yielding 135 basis points more than similar-maturity U.S. Treasuries, 10-year notes at a spread of 165 basis points and 30-year securities at 210 basis points, according to person familiar with the matter who is not authorized to speak publicly and asked not to be identified. The kingdom raised $5.5 billion in each of the five- and 10-year bonds and $6.5 billion in 30-year debt. People with knowledge of the offering earlier said investors submitted $67 billion in bids.

The sale eclipsed Argentina’s $16.5 billion offering in April as the largest from a developing nation, underlining the deepening strain on a nation that has eschewed international debt markets until now. The country registered a budget shortfall of $97 billion last year, equal to 15 percent of its gross domestic product, prompting the government this year to cut subsidies, wages and spending.

“Boom, they went full-scale,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London who bid for the bonds. They “probably want to take advantage of the window before elections and a possible rate increase. Print a lot now and then see what unfolds,” he said.

Roadshow

The offering followed a week of presentations to prospective buyers, taking place in London, Los Angeles, Boston and New York, at which officials emphasized the kingdom’s efforts to diversify the $650 billion economy away from oil. Attendees such as Gregory Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors in London, were concerned the Saudi delegation avoided discussing crude prices.

Saudi Arabia’s Minister of Energy and Industry Khalid Al-Falih said many nations are willing to join OPEC in cutting production to secure a continued improvement in oil prices. So far, only Russia has said it’s considering an output freeze or a reduction, while other non-OPEC producers that cooperated with past supply curbs, including Mexico and Norway, said they won’t cut.

The bond pricing offered a premium to similar-maturity bonds from neighboring Qatar. The country’s five-year bonds were trading at a spread of 98 basis points over U.S. Treasuries, 121 basis points on 10-year bonds and 164 basis points on 30-year securities as of 5:25 p.m. Wednesday in Dubai, according to data compiled by Bloomberg.

Investment Grade

Saudi Arabia is rated A1 at Moody’s Investors Service, the fifth-highest investment grade and two steps below Qatar. Still, the premium wasn’t high enough for some investors.

“I imagine they have enough sovereign wealth fund and cross-over investors sewn up to justify the expensive pricing,” Edwin Gutierrez, the head of emerging-market sovereign debt at Aberdeen Asset Management in London, which oversees more than $400 billion, said before the final price guidance Wednesday. “I can find cheaper bonds elsewhere.”

The sale marks the latest step in Saudi Arabia’s efforts to open up its economy, largely driven by Deputy Crown Prince Mohammed bin Salman. Among proposals are an initial public offering of Saudi Aramco, the state-run oil giant, and further measures to make the $350 billion Tadawul Stock Exchange more accessible to foreign investors.

Sales Spree

“The program which we have heard in the roadshow over the next five to 10 years is really quite dramatic,” Richard Segal, a senior analyst at Manulife Asset Management in London, said Wednesday on Bloomberg television. “They want to really transform the economy because they realize that given how young the population is, they would need to transform away from oil anyway. There’s a lot to do and the question is how forcefully can they implement this program.”

Citigroup Inc., HSBC Holdings Plc and JPMorgan Chase & Co. were joint global coordinators for the deal. Bank of China Ltd., BNP Paribas SA, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Mitsubishi UFJ Financial Group Inc. and NCB Capital also helped manage the issue.

The sale was the latest in a series from the six-nation Gulf Cooperation Council. Even before the Saudi offering, issuance this year rose to an unprecedented $48.3 billion. Qatar sold $9 billion in May, a Middle East record until the Saudi issue, the emirate of Abu Dhabi raised $5 billion in April, and Oman issued $4.5 billion.

Default Risk

Saudi Arabia had $73 billion direct government debt as of the end of August, $63 billion of which was raised from monthly sales of local currency debt. The riyal offerings and a drop in deposits have tightened liquidity in Saudi banks, prompting lenders to raise interest rates they charge one another for loans.

The three-month Saudi Interbank Offered Rate has climbed for 15 straight months, more than trebling to 2.386 percent on Wednesday, the highest level in more than seven years, according to data compiled by Bloomberg.

The cost to insure Saudi Arabian debt against default has fallen in October as a rebound in oil improved the country’s revenue outlook. Five-year credit default swaps dropped 23 basis points to 144 basis points on Monday, the lowest level in a month, and were little changed Tuesday, according to data compiled by Bloomberg.