Saudi Arabia taps bond market for $12.5bn

 Saudi Arabia draws on fixed income investor demand as it seeks to offset oil strains, issuing $12.5bn in 30-year bonds.

Source: Financial Times

Saudi Arabia has launched the largest debt sale by an emerging market government this year, pushing Middle Eastern debt issuance to a record high.

The kingdom’s $12.5bn fundraising includes a 30-year bond, and follows its record-breaking bond issuance in October, when it tapped investors for $17.5bn.

Saudi Arabia has increased its borrowing to help address a three-year slump in oil prices, which have put the country’s finances under strain and forced the country to raid financial reserves built up during the years when crude traded above $100. While targeting a balanced budget by 2020, the kingdom is also planning broader reforms to boost the private sector and diversify government revenues.

The ambitious Crown Prince Mohammed bin Salman has laid out a vision for a $200bn sale of state-owned enterprises, led by a 5 per cent initial public offering in the kingdom’s crown jewel, energy giant Saudi Aramco.

Middle Eastern bond issuance has benefited from a wave of demand for emerging market debt, with low interest rates in major developed economies forcing investors to seek out higher returns elsewhere.

Saudi Arabia was able to cut the extra yield it needed to offer investors over US Treasuries, according to people close to the deal. The final spread on the $4.5bn of 30-year bonds was 180 basis points over equivalent Treasuries, below initial pricing expectations of 200 basis points.

The spread for the five-year and 10-year tranches were 110 and 145 basis points over equivalent Treasuries respectively.

“This is a hot issue,” said one banker. “You get a decent yield for what is a highly rated issuer.”

Saudi Arabia’s new sale has pushed sovereign bond issuance from Middle Eastern countries to its highest level on record, according to Dealogic data. Total sales, including this week’s sale is $47.9bn, up from $37bn over the whole of last year.

In August, Iraq had $6.6bn of orders for a $1bn bond — its first independent debt sale in more than a decade. Bahrain earlier this month drew $15bn of orders for a $3bn bond sale, while Jordan, Oman and Kuwait have also tapped international markets this year.

Saudi Arabia also borrowed $9bn through an inaugural sukuk, a type of Islamic debt, in April this year. It has raised around $19bn in domestic and international Islamic sukuk bond instruments this year, according to a presentation to potential investors in the bond.

The relative resilience of oil prices and tighter spending have allowed the finance ministry to cut the projected deficit for the first half of 2017 to $19.4bn. The budget had planned for a $53bn deficit for 2017. The bond was rated A1 and A+ by Moody’s and Fitch, the rating agencies.