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Financial Times – First Saudi bond sale raises $17.5bn in emerging market record

 

161019-financial-times-ft-com-saudi-bond-sale-copyBy: Elaine Moore in London and Simeon Kerr in Dubai

October 20th, 2016

Saudi Arabia has raised $17.5bn for its debut sovereign bond issue, eclipsing Argentina’s bond sale earlier this year to become the largest debt issue by an emerging economy.

Investors put up orders of $67bn, enabling the kingdom to increase the amount borrowed and overtake the $16.5bn raised by Argentina as buyers queued up in search of yield.

“This is clearly a success for the country,” said Richard House, head of emerging markets fixed income at Standard Life Investments.

Saudi Arabia’s entrance into international markets is part of a broader plan to pivot the country’s economy away from its reliance on oil, as prices slump to half the level of two years ago. The sale is expected to herald a pipeline of new deals, including the world’s biggest initial public offering from state oil company Aramco.

“This is very significant moment for the kingdom — until this year it had not held external sovereign debt,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “They had to issue, given tight domestic liquidity conditions and stretched local funding sources, and we expect to see further issuance going forward — Saudi will become a fixture on global debt markets.”

The multibillion-dollar order book reflected heightened demand for debt issued by emerging markets this year, as interest rates in the developed world remain at historic lows. Argentina, Qatar, Turkey and Mexico have all sold large bond issues and the demand allowed Saudi Arabia to tighten prices. The sale comprised three maturities of five, 10 and 30 years offered at yields of about 2.60 per cent, 3.41 per cent and 4.63 per cent, respectively — slightly below expectations.

“Saudi is an attractive investment, but to be honest nearly every emerging market bond has been a success this year — investors are still desperate for yield,” Mr House said.

According to one investor, Asian buyers were responsible for a significant portion of orders, with investors such as pension funds and insurance companies known to be interested in buying the country’s long-dated bonds.

One investor said the issue was priced at a reasonable level, and would encourage interest in future expected bonds. “Saudi is just one big oil company, right, so there will be managers switching out some of their exposure to get the yield of the Saudi bond,” he said.

The bonds were sold around 40 basis points above debt issued by neighbouring Qatar, which carries a higher credit rating, and about 100 basis point wider than bonds sold by oil companies BP and Shell.

Saudi Arabia would have to embrace a new era of greater transparency as investors pore over its fiscal position and reform programme, he added.

Ms Malik said: “Bondholders will want to see that Saudi Arabia is continuing its fiscal consolidation — they won’t only want to see debt levels going up.”

Saudi Arabia’s economy is forecast to slow this year as oil prices remain low and the country engages in a costly war in Yemen, with the International Monetary Fund forecasting gross domestic product growth of 1.2 per cent this year from 3.5 per cent in 2015.

The IMF has welcomed the government’s Vision 2030 plan, which seeks to crimp spending, raise new non-oil revenue streams and bolster the private sector.

“This issue is important as Saudi Arabia will be in the market for a number of years, so they need to lay out a predictable plan of where they are going,” said Masood Ahmed, the IMF’s managing director for the Middle East, said in Dubai on Wednesday.

“And they need a credible fiscal consolidation plan — they need to show that they have a plan to bring down their financing needs.”

In its pitch to prospective bond investors, Saudi Arabia’s Ministry of Finance acknowledged the damage caused to its economy by falling oil prices, which led the government to resume issuing local currency-denominated bonds last year for the first time in almost a decade.

The kingdom faces a budget deficit of 13 per cent of gross domestic product this year, below last year’s 16 per cent deficit, as spending cuts move from capital projects to public sector wage bill. Next year, the deficit is forecast to fall to 9.5 per cent.

Government debt, now at 5 per cent of GDP, is forecast to reach 20 per cent by 2017 as the state relies on borrowing rather than financial reserves to plug the shortfall.

Although oil prices have recovered from the decade-low of less than $30 per barrel, they have struggled to sustain a rise above $50.

Speaking at the Oil & Money energy conference in London on Wednesday, Saudi Arabia’s energy minister Khalid al Falih said the oil market had come to the end of a downturn, and that the time was now right to tighten supplies and raise prices.

Citi, HSBC and JPMorgan led the sale of debt on Wednesday, with Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, Mitsubishi UFJ, and NCB Capital also involved in the issue.

Additional reporting by Anjli Raval