Macaskill on Markets: The lucrative new Saudi ‘MBS’ market

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By:
Jon Macaskill
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A recent $17.5 billion bond issue by Saudi Arabia was hailed as a resounding success by capital market participants who have a strong interest in further fundraising by the kingdom, including an expected IPO of Saudi Aramco that could break records with a size around $100 billion.

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Even after discounting of a standard IPO fee, the Aramco IPO could still generate around $1 billion of revenue for banks, which creates a powerful incentive for them to promote the viability of Saudi Arabia as a capital markets issuer.

Bankers are also highly motivated to nurture a closer relationship with Saudi deputy crown prince Mohammed bin Salman, the young royal who is overseeing a move to diversify funding sources for the country as it adapts to an era of lower oil prices.

Bankers have been hard at work behind the scenes trying to ensure that media coverage of his role is flattering. It is stressed that he is referred to by his initials as ‘MBS’, for example, just like a modern corporate CEO or politician (Hillary Clinton is HRC to her own courtiers, as leaked emails confirm). Access to ‘MBS’ could prove to be highly lucrative in the coming years, as deal-making picks up.

Saudi Arabia was persuaded to offer a healthy return on its debut international bond issue, which helped to create strong demand from investors in a painfully low global yield environment. 

With around $67 billion of orders placed for the three-part bond, its lead managers were able to increase the size from a planned $15 billion to an eventual $17.5 billion, which conveniently eclipsed a $16.5 billion deal from Argentina earlier this year to become the biggest debt issue ever seen from an emerging market borrower.

The bond’s leads were also able to price the deal at a similar level to comparable debt from Saudi Arabia’s neighbour Qatar, which has higher ratings from credit agencies.

The Saudi deal was a triumph of stage management that places its lead managers JPMorgan, HSBC and Citi in a strong position to generate fees from the expected Aramco IPO and from future sovereign bond issues.

The spoils of the Saudi move into the capital markets will not be confined to the banks with the biggest global distribution networks, however.

There is also money up for grabs for some veteran bankers who have left the investment banks where they started their careers, in part because the new environment of lower compensation and higher regulation makes life at a major firm less appealing.

Michael Klein, a former Citi banker who now runs his own firm, is advising the Saudi government, for example. This could create an interesting dynamic with his one-time colleagues at Citi.

Klein, a mergers and acquisitions specialist, was perceived as arrogant and high-handed by many of his co-workers when he was at Citi, with some of his peers on the trading side particularly resentful of his demands at a time when his area of expertise generated far lower revenues than securities dealing.

The pendulum has since swung back towards fee-generating business rather than trading, so Citi staff in the investment bank that is now run by former bond dealer Jamie Forese will have to stay on the right side of Klein.

Citi is probably in the weakest position of the three lead underwriters on the recent Saudi $17.5 billion bond in terms of competing for future business. JPMorgan has a long-standing role as lead banker to the Saudis and HSBC saw its former Middle East CEO Mohammad Al Tuwaijri join the Saudi government as deputy economy minister in May, which did not do its prospects of generating new business any harm.

Citi, by contrast, is rebuilding its presence in the region after scaling back around a decade ago, which could add to the importance of its relationship with Klein.

Fees from raising money on behalf of Saudi Arabia do not represent the only potential windfall for former bankers. There are also gains to be made from finding new ways to help the Saudis to spend their money.

New avenues

The reduced revenue from oil that has forced Saudi Arabia to explore new avenues for raising funds has not crimped its appetite for spending money. Old habits of excess die hard, and as he pushes to modernize the Saudi economy, the deputy crown prince has been persuaded that massive investment in technology is required.

Some former derivatives structuring specialists from Deutsche Bank are poised to benefit from this initiative.

Rajeev Misra, former head of credit trading at Deutsche, was recently appointed head of the SoftBank Vision Fund, which is being seeded by a commitment of $45 billion from Saudi Arabia and at around $100 billion in total is expected to be the biggest technology fund yet created.

SoftBank (which despite the name is a Japanese-owned technology conglomerate, not a bank) has also engaged former Deutsche managers Nizar Al-Bassam and Dalinc Ariburnu to work on the project of raising and deploying the $100 billion. Ariburnu was most recently global co-head of fixed income sales at Goldman Sachs, which he joined in 2009 from Deutsche, where he had been head of emerging markets. He left Goldman this year to set up a firm called FAB Partners, alongside Michele Faissola, another derivatives veteran from Deutsche whose final job at the firm as head of asset management ended last year, and Al-Bassam.

Ariburnu, like Klein, has clearly decided that the glory days of bonus generation at a big investment bank like Goldman or Citi are over. They certainly appear to be gone for good at Deutsche, which will struggle to pay bonuses at all in the current environment and may instead offer staff participation in a non-core business spin-off, as well as in its beaten down stock.

Technology industry specialists are not convinced that the massive SoftBank Vision Fund will be able to find investment opportunities that are substantial enough to provide strong returns to its investors, including the Saudis.

Even if the fund struggles to find technological innovations to invest in, it is almost certain to use creative financing techniques to manage its money, given the backgrounds of the former bankers involved in the $100 billion initiative.

It is also safe to assume that the former bankers themselves will be handsomely rewarded.

Markets such as mortgage-backed securities (MBS) once helped to generate enormous bonus payments for bankers, before eventually saddling their banks with far bigger costs for misconduct – with a push for $14 billion of MBS fines by the US Department of Justice the main source of Deutsche Bank’s current problems. 

But access to the Saudi ‘MBS’ and his subordinates seems set to be the gift that will keep on giving for a select group of former bankers.