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Saudi Arabia took its first major step onto the global financial stage on Tuesday, issuing $12 billion of bonds for its state-run oil company in one of the most oversubscribed debt offerings in history.

The demand for Saudi Aramco's debut offering was so robust that it allowed the energy giant to borrow at a lower yield than its sovereign parent. That's a rarity in the debt world and underscores the global chase for yield that has investors brushing off long-held conventions. The rush to buy Aramco's debt even helped to drag down the borrowing costs of the kingdom.

The bond sale raises money to finance Saudi Arabia's economic agenda after an initial public offering of Aramco was postponed last year until at least 2021. Saudi Crown Prince Mohammed bin Salman, who runs the country day to day, is using the state oil producer's pristine balance sheet to finance his ambitions for the economy.

The crown prince, who came to power in June 2017, has promoted the Vision 2030 strategy, which aims to boost domestic manufacturing, increase the number of women in the workforce and build a private sector in industries other than energy, such as tourism, tech and entertainment.

One big goal is to ensure employment for Saudi Arabia's young population in the private sector, and to move workers off the public-sector payroll. More than 60 percent of Saudis are under age 30.

The success of the deal has also been seen as essential for some of the world's biggest banks, who took Aramco and officials from the Saudi government -- a wildly lucrative client -- on a worldwide roadshow last week pitching the bonds from Boston to Singapore. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., touted the deal at a lunch in New York.

The red-carpet treatment stood in sharp contrast to the reception many financial leaders gave the kingdom a year ago, when banking executives including Dimon skipped a high-profile conference in Riyadh after the assassination of journalist Jamal Khashoggi. The U.S. has blacklisted 16 Saudi citizens for their role in the murder of Khashoggi, a Saudi insider-turned-critic who had moved to the U.S.

JPMorgan and Morgan Stanley managed the bond sale along with Citigroup Inc., Goldman Sachs Group Inc., HSBC Holdings PLC, and NCB Capital Co.

During its roadshows, investors were showered with financial data and operational secrets of the kingdom's most important asset, information that had been held closely since the company's nationalization in the late 1970s.

The disclosures gave investors plenty of reasons to jump on the deal. With $111.1 billion of profit in 2018, Aramco ranks as the most profitable company in the world.

"There's no debating how strong of an entity this is when looking at its assets and cash flow generation," said Bob Summers, an investment-grade portfolio manager at Neuberger Berman in Chicago.

But attracting the foreign expertise and investment needed to meet the kingdom's economic diversification goals won't prove as easy as drawing foreign investors to a bond sale, Saudi experts said.

"There's a ton of interest in buying Aramco bonds and owning a piece of Saudi Aramco, or at least its debt," said Jim Krane, an energy studies fellow at Rice University in Houston. "When it comes to actually moving your personnel to the kingdom and opening a franchise there and being subject to Saudi laws and courts, the enthusiasm is quite a bit lower. There's a lot of questions about rule of law in Saudi Arabia, especially over the last couple of years."

Investor orders for the five-part deal exceeded $100 billion at the peak on Tuesday, according to people with knowledge of the matter. A $3 billion, 10-year bond, for example, was priced to yield 0.125 percentage point less than what investors demand to own similar-maturity debt of the Saudi government, said the people, who asked not to be named discussing the private deal. Government debt is traditionally seen as a safer bet and offers lower returns; U.S. Treasury notes, for example, on Tuesday were priced to yield 1.05 percentage point less than the Aramco offering.

Aramco received the strongest demand for longer-dated, highest-yielding bonds, which are effectively a bet on Saudi Arabia and oil around the year 2050.

While other corporate-bond sales have generated $100 billion-plus of orders -- including CVS Health Corp., Anheuser-Busch InBev NV and Verizon Communications Inc. -- those companies targeted a substantially larger amount of debt. The final order book came in at $92 billion as Aramco dropped a planned floating-rate note and some requests were pared back.

Moody's and other credit raters have tempered their enthusiasm, rating it in line with the Saudi government with the fifth-highest investment-grade ranking.

Information for this article was contributed by Molly Smith, Brian Smith, Archana Narayanan, Javier Blas, Dan Wilchins, Natalya Doris and Lyubov Pronina of Bloomberg News; and by Jeanne Whalen of The Washington Post.

Business on 04/10/2019

Print Headline: Investors flock to Saudi oil giant's first international bonds


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