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Saudi Arabia creates history with debut int’l bond offering – Sovereign issue sets new benchmark for GCC

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by October 22, 2016 General

LONDON, Oct 21, (RTRS): Saudi Arabia re-wrote the record books with its debut in the international markets on Wednesday as it sold the biggest emerging markets bond deal in history, establishing a new benchmark for the Middle East in the process.

The GCC sovereign raised US$17.5bn through its offering of US$5.5bn of five-year, US$5.5bn of 10-year and US$6.5bn of 30-year notes.

Some market sources suggested there was an element of egotism about the deal, which just eclipsed Argentina’s US$16.5bn transaction earlier this year. Indeed, it’s the biggest syndicated bond deal by any sovereign.

Yet bankers close to the deal say there was no deliberate strategy to achieve a record size.

Instead, the leads said that as the trade evolved, the US$17.5bn size became the best option in attaining the appropriate price and distribution, given the level of demand.

Books reached an incredible US$67bn, with some accounts putting in US$1bn orders across different portfolios. Interest came from high-grade accounts, emerging markets investors, commodity funds, insurers, central banks and other financial institutions as the opportunity to get yield from a Single A sovereign proved compelling.

After the books went subject, the global coordinators put forward a range of size options to Saudi officials from US$10bn to US$20bn-plus, in US$2.5bn increments.

“The question was what were the price breaks for each option,” said a banker at one of the leads.

The sovereign could have raised US$10bn, which was the amount many investors had expected, at much tighter levels but that would have left many accounts under-allocated. One of the main aims was to get true global distribution and not rely on local demand.

A US$20bn deal, on the other hand, might have felt too big, especially as Saudi is expected to become a regular issuer.

Balance

“The balance of size, price and distribution was best at US$17.5bn. That was the point that everything came together,” said the banker.

Most striking was the 30-year note issue. “The 30-year was a statement,” said a second banker at one of the leads.

Saudi subverted the usual thinking around size and tenor on a multi-tranche transaction by making its longest-dated security the biggest. It was a move applauded by rival bankers.

“It’s a sensible strategy to take more out of 30 years right now, given the quality of demand in that part of the curve,” said one banker away from the deal.

Momentum for the 30-year tranche was driven by Asian accounts, such as life insurers, vindicating a decision to undertake a non-deal roadshow in Taipei and Singapore in July.

“That worked so well,” said a third banker involved in the deal about the Asia meetings. “The minute we announced the deal we got a 100% hit ratio from Asia. It wasn’t a long list but all the life companies bought because they were ready and wanted long-dated paper.”

Asian investors took 22% of the 30-year tranche, though US buyers got the most with 44%.

Interestingly, Saudi (A1/A-/AA-) priced the 30-year at the same spread as where higher-rated Qatar (Aa2/AA/AA) printed its similar-dated bonds in May, at 210bp over Treasuries.

And at 4.5%, the coupon on Saudi’s 30-year was inside the 4.625% on the Qatar June 2046s.

The five-year tranche was the most popular. There was plenty of interest from Middle East banks, which liked the tenor, but in terms of the actual allocation US and European investors got the biggest portion, with a combined share of 74%.

The 10-year tranche, meanwhile, was like a traditional 144A/Reg S emerging markets offering at that tenor, backed as it was mostly by institutional accounts from Europe and the US, though Middle East investors also got a decent chunk.

Tightened

That tranche was tightened the least from initial price thoughts: by 20bp, compared with the 25bp undertaken on the five and 30-year tranches – a reflection of the price sensitivities of US real money managers.

The 2021s were priced at 135bp over Treasuries, the 2026s at plus 165bp, and the 2046s at plus 210bp.

It meant that Saudi came about 25bp back of Qatar on the fives, 30bp on the 10s and about 35bp on the 30s.

That was too tight for some EM fund managers, especially as the bonds are not index-eligible, but not all with the big guns in the deal.

All the notes traded up in the secondary market by 0.5-1.5 points but, just as significantly, the deal led to a rally across the GCC.

The challenge for Saudi Arabia now is to enact the reforms that deputy crown prince Mohammed bin Salman has outlined as part of his Vision 2030.

The bond prospectus and roadshow, which was so packed that in London they had to move the venue twice, went some way in opening the country to greater scrutiny.

But while some investors praised the roadshow presentations, others complained that government officials were vague about details on the economy.

“Transparency is a weakness,” said one EM fund manager in London.

In New York, some hedge funds, including some known to be bearish about the Saudi economy, were stopped from entering the roadshow meeting.

The first banker explained that it was an issue of logistics and prioritising accounts given the level of interest, but it left some wondering whether Saudi officials wanted to avoid answering potentially difficult questions about their policies, especially on oil prices.

The banker said that it is difficult for Saudi officials to be too explicit about its oil price assumptions, given the country’s influence on the market.

But he added that the sovereign understands “it can’t be on the outside of global financial markets” and wants to continue reaching out to investors.

Citigroup, HSBC and JP Morgan were the global coordinators on the transaction.

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