Saudi Arabia set to launch its first international bond sale Wednesday

Saudi Arabia is set to launch its first ever international bond sale Wednesday as the kingdom turns to debt markets to help ease a fiscal squeeze from the two-year decline in oil prices.

Banks connected to the sale said the Saudis are due to conclude a transatlantic roadshow on Tuesday for the dollar-denominated bond — one of the most eagerly awaited issues this year — after which they will release initial price guidance.

Riyadh is thought to be targeting a sale between $10 billion and $15 billion, making it the largest issue of international debt in the Middle East and a potential rival to Argentina’s record breaking $16.5 billion emerging market bond sale earlier this year.

Bankers said strong demand is expected for the debut bond, which comes amid heavy buying of other emerging market debt, including Mexico, Qatar and Argentina. “All going well they should print later in the week,” said one banker.

Investors who have met Saudi delegates say they expect the bonds — likely to be split into five, 10 and 30-year maturities — to be issued with a yield anywhere between 160 and 200 basis points over equivalent US government benchmarks.

The kingdom’s first international bond is part of a radical plan to wean the kingdom’s economy off its reliance on oil and was first announced in November 2015, as oil prices fell to $50 a barrel from $115 a barrel the previous year.

Prices for oil remain around $50 a barrel as Opec seeks to formally agree the terms of a production cut at its annual conference in late November.

Riyadh has reacted to the fall in oil prices by cutting government spending, burning through foreign reserves and raising debt to finance steep budget deficits that have not been seen since the 1990s.

Between the end of December 2015 and end of August 2016, Saudi Arabia’s debt levels increased from 142.2 billion Saudi riyals ($37.9 billion) to SR273.8 billion ($72.9 billion), according to the prospectus for the country’s new bond.

A 10-year Saudi bond is expected to serve as a benchmark, and rates are likely to be set based on current levels of a 2026 bond issued by neighboring Qatar, which trades with a yield of 3.09 per cent, and Saudi Electricity, which has a dollar-denominated, 2024 bond trading at 3.56 per cent.

Bankers in the Gulf are busy preparing a raft of fresh deals once the Saudi bond process is complete. Riyadh is weighing whether to follow the sovereign debt issuance with a public offering for its state oil company, Saudi Aramco, which could be the largest IPO ever.

The government of Jordan will hold road shows in Europe and the US this week ahead of its own planned 10- and 30-year sovereign bond.

Equate Petrochemical, a Kuwaiti state joint venture with the Dow Chemical company, is also scheduled to meet investors ahead of its own bond later this week. The company is also expected to launch its bond in the wake of the landmark Saudi issuance, the banker said.

“The Saudi bond has been a big dam holding back this tide,” the banker said. “We will see a flurry of activity this month.”

According to a report published by S&P on Monday, the six economies that make up the Gulf Co-operation Council, which includes Saudi Arabia, will need to borrow a combined $560 billion over the next four years in order to plug the deficits opened by the fall in oil prices.

Source: The Financial Times