Saudi Arabia Is Looking for Friends
Saudi Arabia is set fair to bring its first foreign bond sale for a minimum of $10 billion. But, let's face it, $20 billion has a nice ring to it if they can get to that, especially as it would beat Argentina's $16.5 billion in April.
Indicative yields have been posted in the region of 2.60 percent for 5 years (160 basis points over similar maturity U.S. Treasuries), 3.60 percent for 10 years (plus 185 basis points) and 4.85 percent for 30 years (plus 235 basis points, a total steal that will tempt many hedge funds to go long).
It will just be too tempting for most yield-starved investors, heavily underweight in a region that rarely issues. Of course these teaser spreads will probably be "walked in" -- or tightened -- by the lead managers, but even so they must have one of the world's easiest sells. The final pricing is expected to come at a slight premium of between 10 and 30 basis points above recent issues from Qatar and Abu Dhabi.
Investors at crowded roadshow meetings have noted a conspicuous lack of desire on the part of the kingdom to be drawn into what happens if crude slumps again. But yields like these help overcome a lot of doubts about that OPEC oil freeze deal with Russia.
And there's a reason why the kingdom is setting a premium that guarantees success and creates hunger for more. You can expect another $100 billion or so of issuance to come down the pipe over the next few years. That's not to mention the real goal: setting the stage for next year's Saudi Aramco IPO, expected to set a new record on size.
After always relying on their hydrocarbon treasure trove, the Saudis have had their hands forced by structural budget deficits and the need to replenish FX reserves (about $170 billion of which they've burnt through). This means letting debt/GDP rise from about 6 percent last year to as much as 30 percent by 2020 -- still pretty modest by global standards. The Saudi economy is undergoing a seismic change on how to cope with a budget deficit of 13.5 percent of GDP, but with $14 trillion of proven oil and gas reserves you have some serious security.
Having net foreign assets worth more than 170 percent of GDP, according to Stratton Street LLP, is another source of comfort. The expected deterioration is so glacial that even in 50 years time, there should be more than 100 percent of GDP in net foreign assets. Saudi Arabia must be one of the most solvent countries.
It's also a first-time issuer -- no debt outstanding is a rare sight to behold on the Bloomberg -- which is always a novelty attraction, especially as investors constantly bemoan not being able to buy debt in entities where they feel safe lending. That's why the directly comparable Qatar and Abu Dhabi sales went so well. Others will follow, such as Jordan. Saudi Electric issued global sukuk (Islamic finance) more than two years ago and its 2024 bond trades almost 200 basis points higher than the 10-year U.S. Treasury.
Of course, there's the war in Yemen and involvement in Syria. But politics and moral qualms will no doubt be outweighed by getting on board with a new issue that will form a significant chunk of relevant benchmark indices. Expect a book size of several multiples as big funds hunt big allocations. Note the Asian lead managers Bank of China and Mitsubishi UFJ are there for a reason, so expect very strong participation from Asian sovereign wealth funds. It's not one you'd want to miss.
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