Business

SAUDI ARABIA’S RECORD $17.5 BILLION BOND ISSUE

Saudi Arabia’s record $17.5 billion bond issue

Saudi Arabia conducted the largest-ever emerging market bond sale last month, selling $17.5 billion of debt in the government’s first international offer while attracting investor orders totalling almost four times that amount. Reuters attributed the huge demand, larger than many market participants had expected, to ultra-low global interest rates and the frustration of many funds about a lack of high-yielding assets around the world. However, Reuters also pointed out that the sale was a success for Saudi Arabia, the world’s top oil exporter, in its efforts to convince investors that it can cope with an era of low crude prices and ultimately reduce its dependence on oil. London-based Capital Economics estimated the bond issue would finance around a third of Saudi Arabia’s budget deficit and almost all of the kingdom’s current account gap, meaning its foreign exchange reserves were unlikely to fall much further in coming years. In 2017, the kingdom ran a record budget deficit of $98 billion or 15 percent of gross domestic product“This should dampen any lingering concerns that the riyal will be devalued” said Capital Economics.“ The government’s debt-to-gross domestic product ratio will rise as a result of the bond sale but, given its low starting point, it is hardly on a worrying path”. The issue eclipsed the previous record for an emerging market sovereign bond sale, a $16.5 billion issue by Argentina in April. Reuters quoted a source familiar with the offer as saying order books totaled $67 billion, coming close to the $69 billion record set by Argentina. In the days before the sale, senior Saudi officials held a series of meetings with top investors in London and the United States to describe the kingdom’s ambitious economic reform plans that include sharp cuts in state spending and a drive to develop non-oil businesses. The successful sale is expected to set a benchmark for the kingdom and pave the way for further international issues by the government in coming years, as well as bond sales by large Saudi companies. Mohieddine Kronfol, chief investment officer for Middle East fixed income at major asset manager, Franklin Templeton Investments, said the debut issue would invigorate Saudi financial markets.“Not only could the bond help develop the kingdom’s debt markets by introducing a more sophisticated type of investor” he said, “but there are also positive ripple effects for Gulf Cooperation Council fixed income as well as more global investors to take a closer, and longer-term, look at the region.”The bond was priced more cheaply than many investors had expected. A $5.5 billion five-year tranche was launched at 135 basis points over U.S. Treasuries, a $5.5 billion 10-year tranche at 165 bps over, and a $6.5 billion 30-year tranche at 210 bps over. Bankers were particularly surprised by the pricing of the 30-year tranche, given uncertainty about the future of the energy industry in coming decades.“They’ve managed to price it really tight – 210 bps is 25 bps inside initial guidance which is a massive drop, and clearly indicates that demand has been overwhelming on the 30-year,” Reuters quoted one banker as saying.

Short link :

Related Stories

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button