Saudi Arabia preps investors for first debt sale

One of this year’s hottest debt sales beckons.

Saudi Arabia is offering investors a revolutionary agenda for economic reinvention as it prepares to sell its first international bond — a multibillion dollar sale that may come as early as this week.

Delegates flew to the UK and US last week to lay the groundwork for an issue forecast to break records and pave the way for a pipeline of deals, including the world’s biggest initial public offering from state oil company Aramco.

As officials and bankers make the case for Saudi Arabia’s long-anticipated market debut, these are the questions prospective investors are asking:

What’s the story?

Bond roadshows are marketing exercises, and investors have a history of rewarding compelling narratives.

Argentina secured a record sale of debt in April with its story as the comeback kid — highlighting a new investor-friendly government who wanted to bring the country to market after years as an outcast.

Saudi Arabia appears to be taking a similar approach — promoting younger technocrats implementing radical reform, as well as the novelty value of the country’s first appearance on global capital markets.

Those present at some of the early investor meetings in London say Saudi Arabia’s presentation focused on the size of its economy, lack of external debt, plans for reform and young population — adding that there was an emphasis on plans to increase transparency.

“The story is not unreasonable,” says one investor briefed on the meeting. “It’s the same tune they have been singing all year long.”

What price does Saudi want?

The rate Saudi Arabia secures for its first dollar-denominated bond will set the tone for all future borrowing, and the country will be hoping to set a low yield for the planned five-, 10- and 30-year bond issues.

Government related entities are waiting to launch their own bonds as they struggle to cope in the kingdom’s troubled economic environment that thanks to much lower oil prices has clipped nominal gross domestic product by 14.3 per cent since 2014.

“There will be a rush of roadshows in the last period before the US election,” says one banker involved in the deal.

It is up to bankers to make sure the price is one that both the kingdom and investors are happy with. Record low bond yields have evaporated, but global rates are still relatively low thanks to central bank stimulus in Europe, the UK and Japan and the US Federal Reserve’s decision not to raise interest rates — providing a low base from which the bond will be priced.

When Qatar sold $9bn of debt in May, it paid a risk premium of 150 basis points (bps) above the rate on US Treasuries for 10-year paper — a generous payout that enabled the tiny gas-rich state to increase the amount issued.

Abu Dhabi, the oil-rich emirate described as the gold standard of regional issuers, paid even less — issuing at 125 basis points on its 10 year bonds for its smaller $5bn issue.

Saudi Arabia has a lower credit rating than Qatar — A rather than AA — so should pay a higher rate. But if it limits the size of the sale it could keep the premium relatively small.

One banker in the region says Saudi could expect to pay 30 to 40 bps more than Qatar — which would mean a 10-year yield of 3.55 — 3.65 per cent. Another banker not involved in the deal estimates that Saudi Arabia will price at 150 basis points over US Treasuries for a five-year bond and 160-165 for 10-year debt — which would mean a 10 year borrowing rate close to Qatar’s.

How much will Saudi borrow?

Investors, hearing about strong interest for the prospective 30-year bonds from Asian insurers, believe Saudi’s desire to raise between $10bn-$20bn will be more than matched by demand of up to $50bn.

Senior officials presenting to investors drew their attention to plans for the kingdom to target a debt-to-GDP ratio of 30 per cent. Saudi Arabia’s recently drafted economic blueprint foresees this level of indebtedness by 2020. Last year, the ratio stood at 5.9 per cent.

“We are probably going to see $15bn-$20bn this year, the same amount next year, and so on for the foreseeable future,” says one of the prospective investors.

All indications point to the sale marking the start of more than $120bn in the coming years.

Can the economy survive low oil prices?

As the world’s largest oil producer, Saudi Arabia has been hit hard by the recent collapse in energy prices.

Since mid-2014 oil prices have more than halved, forcing the central bank to burn $170bn in foreign reserves to shore up this year’s budget deficit of 13.5 per cent of gross domestic product and fund the costly war in Yemen.

In May, Saudi Arabia and two other oil-exporting Gulf economies had their credit ratings cut by Moody’s — following similar downgrades by S&P Global Ratings and Fitch. Moody’s cited a combination of falling growth, rising debt and smaller domestic buffers that left it less able to weather future shocks.

In the bond prospectus sent to investors, Saudi Arabia warns that low oil prices pose a challenge to its economy. However investors present at some of the first meetings on the bond roadshow say officials refused to be drawn on the prices they expected to see oil in future — and how the economy would cope if prices fell back to $30 per barrel — preferring to stress plans to overhaul the economy. This, according to one person present, left some investors agitated. “We asked the same question a number of different ways and didn’t manage to get an answer,” he says.


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