Saudi Arabia, seeking to expand petrochemicals production and diversify the economy, will tap debt markets to benefit from falling Middle East debt yields, officials from the kingdom’s main oil and chemicals makers said.
State-owned Saudi Arabian Oil Co., known as Saudi Aramco, plans to borrow to support its expansion in chemicals, Chief Executive Khalid Al-Falih said Oct. 8. The company is planning about $26 billion in refineries and petrochemical facilities that may sell debt next year. Saudi Basic Industries Corp., the world’s second-biggest petrochemicals producer, may also sell bonds next year to refinance existing borrowings, its CEO said.
Persian Gulf oil producers like Saudi Arabia, neighboring Qatar and the United Arab Emirates are expanding petrochemicals output to benefit from transforming their oil and natural gas reserves into more valuable products, like plastics. Saudi Arabia, the largest Arab economy, aims to attract foreign investors to build clusters of manufacturing industries around refineries and chemical plants to create jobs.
“We’re optimistic on issuance in the region and the appetite for bonds and sukuk,” Gabriel Sterne, an economist with emerging markets specialist Exotix Ltd. in London, said by telephone Oct. 20. “Over the next year, markets will be more discriminatory and that should favor regional bonds.”
The extra yield investors are demanding to hold Middle East bonds over U.S. government debt narrowed 40 basis points over the past three weeks to 420 basis points, from this year’s Oct. 4 high, JPMorgan data show.
“The expectation is that yields will stay down,” Paulina Chahine, an economist at Jeddah-based National Commercial Bank, said in an interview in Dubai yesterday. “They will go away happy,” she said, referring to the pricing Saudi petrochemical projects will get when they tap debt markets next year.
Saudi Aramco and Dow Chemical Co. plan to tap debt markets to fund a about $20 billion petrochemical plant at the Persian Gulf port of Jubail, the Saudi company’s CEO Al-Falih, said.
“It’s a big project that needs a lot of debt,” he said at a contract signing ceremony for the plant in Dhahran Oct. 8. Aramco plans to sell part of its 65 percent stake in the facility in an initial public offering that would take place at the earliest in late 2013, he said.
That project and another Aramco venture with Sumitomo Chemical Co. of Japan at Rabigh on Saudi Arabia’s Red Sea coast are planning both debt and share sales to raise cash, executives from the ventures said.
Rabigh Refining & Petrochemicals Co., a fuel producer, will sell additional shares to existing and new investors to fund the growth plan, Chief Executive Officer Ziad al-Labban said Oct. 2 in an interview in Dubai. The company may also do a mix of bank borrowing and export-credit financing for the plan, he said. That project is set to cost about $6 billion.
“Saudi Arabia’s megaprojects all need an IPO and a debt element for funding,” Brad Bourland, chief economist at Riyadh-based Jadwa Investment Co., said at a conference in Abu Dhabi Oct. 17. “They’ll continue going to the capital markets for both traditional and Islamic funding, which makes sense since debt is cheaper than equity and companies like Saudi Aramco can raise money very cheaply.”
Aramco and partner Total SA of France this month completed the sale of 3.75 billion riyals ($1 billion) of Islamic bonds, known as sukuk, for joint refinery and petrochemical venture.
Jubail-based Saudi Aramco Total Refining & Petrochemical Co. sold the debt at 95 basis points over the six-month Saudi Arabian Interbank Offered Rate, according to Deutsche Bank AG data. That was at the bottom of the venture’s 95 to 105 basis points range for the sale.
Second Islamic Bond
The company may issue a second Islamic bond after investors put in orders for 3.5 times more of Satorp’s initial sukuk than the company offered, Jamal Al-Rammah, chief of corporate finance for Saudi Aramco, said Oct. 9.
Saudi Arabia is looking to integrated refining and petrochemical projects to produce more profitable goods and jobs.
“Saudi Aramco aims to diversify into materials side by side with oil production,” Michael Hurst, a director in the company’s chemicals business, said at the Oct. 17 conference in Abu Dhabi. “It’s important for our company and for the country and it will increase profitability. It will help enhance the value of Saudi Arabia’s oil and gas reserves. We see ourselves as agents of further industrialization in Saudi Arabia.”
Saudi Basic, the world’s second-largest chemical maker, known as Sabic, may sell securities, including debt compliant with Islamic law, in 2012, Chief Executive Officer Mohamed Al Mady told reporters in Riyadh on July 17.
Sabic last sold securities in October, issuing $1 billion of five-year notes. The yield on Middle East corporate bonds has fallen 90 basis points, or 0.9 of a percentage point, to 5.07 percent as of yesterday’s close, from this year’s Feb. 28 high, the HSBC/NASDAQ Dubai Middle East Conventional Corporate US Dollar Bond Index showed.
The yield on the company’s 3 percent bond maturing November 2015 has plunged 167 basis points since peaking this year on March 1, data compiled by Bloomberg show. The rate was 2.53 percent today, down from the high of 4.2 percent March 1, when anti-government protests in the Middle East threatened to spread to Saudi Arabia.
Sabic is second by market value among chemical makers after Germany’s BASF SE. BASF and Dow Chemical had higher annual sales than Sabic in 2010.