Saudi Arabia aims to capitalize on bond blowout

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By:
Olivier Holmey
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Kingdom’s debut is largest ever EM deal; Vision 2030 chimes with investors.

Saudi Arabia has produced a record-breaking $17.5 billion deal with its first dollar bond, as it seeks new ways to trim back its huge budget deficit produced by the dramatic fall in the price of oil.

October’s long-awaited bond issue garnered very strong demand – at its height, the book contained $67 billion of orders. That enabled the Kingdom to raise far more than most analysts had expected, making it the largest emerging market trade, and the largest sovereign dollar bond, ever. 

Even Argentina’s much trumpeted deal earlier this year was smaller, at $16.5 billion, though its book was larger – at close to $70 billion.

Strong demand also allowed Saudi Arabia to obtain a lower interest rate than originally planned. Its popularity was such that, even after the rate reduction, the book still had $63 billion of orders.

The bond is widely viewed not only as a success in and of itself, but also as a sign that international investors have bought into Saudi Arabia’s Vision 2030 – an ambitious plan of economic, social and political reform unveiled in April, aimed at weening the country off oil, the natural resource that has been its main source of revenue for decades, but which now sells at just $50 a barrel, half its mid-2014 price.

Because the vision – which echoes similar reform plans by Qatar and Abu Dhabi – implies such a comprehensive overhaul of the way things work in Saudi Arabia, many observers have questioned the Kingdom’s ability to deliver on its promise. 

Meanwhile, criticism of Saudi Arabia’s costly and brutal conflict in Yemen, the gradual return on the world stage of Iran, Saudi Arabia’s principal rival in the Middle East, and the recent passing of a law in the US allowing victims of the 9/11 terrorist attacks to sue the Kingdom, suggest a degree of Saudi isolation not seen in years.

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Jean-Marc Mercier, HSBC

None of these fears appear to have overly concerned investors. As if to underline confidence in the Kingdom’s long-term prospects, the largest of the deal’s three tranches was also the longest – due to mature 30 years from now. Jean-Marc Mercier, global co-head of debt capital markets at HSBC, one of the deal’s global coordinators, says that during the roadshow, no investor even asked about the US terrorism bill, though it had just recently been adopted.

“It’s just a huge market landmark,” says Mercier. “It’s put a lot of confidence into the market locally for the rest of the GCC. Basically they established themselves as the new benchmark of the region in just one day. The confidence that was demonstrated from investors, even as people say the Middle East is in trouble – I’ve been very impressed that we had $50 billion oversubscription on the book. That was a very, very strong statement from investors.”


Truly international

A Saudi delegation led by the Kingdom’s minister of state, Mohammed Al-Sheikh, went out on the deal roadshow with the global coordinators Citi, HSBC and JPMorgan. Investor meetings began in Asia over the summer, then, in the days preceding the trade’s launch, took place in London, Los Angeles, Boston and New York.

New York being the last stop on the roadshow indicated that the issuer wanted the deal to be truly international, rather than led by US investors. The US investors did contribute a large chunk of the deal, but by the stage they came in, Saudi Arabia already had a clear sense of the size and pricing it could achieve.

Mercier says there was huge enthusiasm for the deal on the road: about 130 investors attended the London meetings, far more than usual, while after the New York presentation, investors broke into applause. Another lead banker tells Euromoney that about 300 investors attended the roadshow.

Taher Agueel, who sits on the boards of Merrill Lynch Kingdom of Saudi Arabia and of Prince Alwaleed bin Talal’s Kingdom Holding Co, says the deal was a success in large part because it opens the market up to the Kingdom. “Saudi Arabia has paved the road for issuing and now we should start seeing them periodically coming back to the market for funding,” he says.

Though he was not involved in the deal, Bernd van Linder, CEO of Saudi Hollandi Bank, was delighted with the result. The influx of foreign money will help mitigate the liquidity shortfall of Saudi banks, he says.

Anita Yadav, head of fixed income research at Emirates NBD in Dubai, agrees with that assessment but says this injection will only serve as a short-term fix and does not fundamentally solve Saudi’s liquidity troubles. She argues that only the implementation of the country’s planned shift away from oil dependence will do so.

This new deal, along with the $25 billion Saudi Arabia has raised on the domestic market in 2016, should enable the Kingdom to plug just under half of its deficit this year. It may yet raise more domestic debt, but few expect it to return for another dollar deal before next year.

The country will make up the difference by using some of its $600 billion in reserves.

The bond consisted of $5.5 billion of debt maturing in 2021, $5.5 billion maturing in 2026 and $6.5 billion maturing in 2046. The tranches were priced at 135 basis points, 165bp and 210bp, respectively.