Investors hail ‘historic’ $17.5bn Saudi global bond sale

RIYADH: Saudi Arabia raised $17.5 billion in its first international bond offering, HSBC said, reflecting strong interest as the Kingdom seeks to diversify its economy.
The bond issue — the first time Saudi Arabia has turned to international markets for financing — was hailed as historic by investors and according to official media was nearly four times oversubscribed.
“It was the biggest syndicated issue ever by any country,” said Jean-Marc Mercier, co-director of the debt capital markets division at HSBC, which took part in the transaction and confirmed the figure.
Saudi Arabia is seeking financing as it moves to diversify its economy.
The Kingdom is projecting a budget deficit of $87 billion this year after a fall in oil revenues, which still account for most of its income.
A veteran banker in the Kingdom said the issue would be considered a major achievement.
“The rate came in at good levels. It’s got to be viewed as a big success for the country,” he said.
Saudi Arabia divided the issue into three tranches with maturities of five, 10 and 30 years, HSBC said.
The $5.5 billion in five-year bonds carries a coupon that pays annual interest of 2.375 percent.
A further $5.5 billion in 10-year bonds carries a coupon of 3.25 percent, and the $6.5 billion in 30-year bonds has a coupon of 4.5 percent.
The effective annual interest rate is 2.588 percent on the five-year bonds, 3.407 percent on the 10-year bonds,and 4.623 percent on the 30-year bonds.
The official Saudi Press Agency reported that total subscription requests amounted to $67 billion, or almost four times the $17.5 billion offered.
Saudi Arabia had previously issued domestic bonds but that led to a tightening of bank liquidity, according to Patrick Dennis, lead Middle East economist at Oxford Economics in London.
“That’s the main reason why they’re now borrowing overseas,” he said.
Saudi banks’ loan-to-deposit ratio rose for the fifth consecutive month in August, reaching 90.8 percent, because of faster growth in credit relative to deposits, Riyadh’s Jadwa Investment said in a report this month.
While bank stress may be a factor, the veteran banker in Saudi Arabia said an international bond sale fits with the kingdom’s global outreach.
“A lot of international investors don’t like to buy the local currency,” preferring US dollars, he said.
Borrowing abroad also reduces the drain on the kingdom’s foreign reserves.
Official figures show those reserves declined to $562 billion in August from $732 billion at the end of 2014.
London-based Capital Economics said in a briefing paper that Saudi reserves are now “unlikely to fall much beyond their current level in the coming years” because the bond issue will finance around a third of next year’s budget deficit and almost all of the current account shortfall.
In April, Saudi Arabia released its wide-ranging Vision 2030 for diversifying the economy.
At its heart is a plan to float less than five percent of Saudi Aramco on the stock market.
Proceeds would help form what will become the world’s biggest state investment fund, with around $2 trillion in assets.
The veteran banker said Saudi Arabia’s first global bond sale is a “small start in the big picture” and is likely to be repeated.