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Sun 12 Jun 2016 08:43 AM

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Saudi Arabia's first international bond sale discussed

Kingdom likely to hire from list of banks that underwrote US$10bn loan in May

Saudi Arabia's first international bond sale discussed
Image for illustrative purpose only. (Yasser al-Zayyat/AFP/Getty Images)

Bankers are expecting to be notified soon about the line up to lead Saudi Arabia's debut international bond transaction after pitches took place in Riyadh.

The kingdom is likely to hire from the list of banks that underwrote a US$10bn loan in May, which was coordinated by JP Morgan, HSBC and Bank of Tokyo-Mitsubishi, though a number of others were also involved.

The hiring process took a step forward this week after several banks vying for the mandate met Saudi officials. Even so, an imminent deal is unlikely as documents have yet to be readied, according to bankers familiar with the matter, who reckoned post-summer was more probable.

One banker who attended the meetings said that an overall issuance programme was discussed, not just the specifics about the forthcoming deal.

"We all have an idea of what they need to do and what they can do," he said.

The sovereign is expected to raise at least US$10bn as it seeks to tackle its burgeoning fiscal deficit, although some bankers speculate it could be more.

"So long as they create a coherent story for investors, I don't see them having any problem raising more than US$10bn," said a debt capital markets official at a firm chasing the mandate.

A banker in the Middle East agrees that Saudi has the potential to issue one of the biggest bonds in emerging markets history.

"We are assuming it will be somewhere around US$15bn, give or take a few billion either side,” said the banker.

However, with the sovereign likely to become a regular borrower, it may decide to hold back from issuing too much in this first transaction to avoid overwhelming investors.

Another issue will be pricing. With no outstanding curve, the process to gauge fair value will be as much art as science. Other similar-rated sovereigns, such as Abu Dhabi and Qatar, will be used as reference points.

"I would expect them to pay a premium over Abu Dhabi," said one banker at another firm chasing the mandate. "As for Qatar it depends on the size. I wouldn't expect them to come inside Qatar but I wouldn't expect a big premium either."

Abu Dhabi's May 2026 bonds are trading at a yield of 3.14 percent, according to Eikon or Z-spread of 165bp. Qatar's June 2026 notes are at 3.42 percent yield or spread of 194bp.

Abu Dhabi and Qatar proved that there's plenty of demand for Gulf sovereigns, with both generating huge books, enabling them to print jumbo deals. Abu Dhabi raised US$5bn through its trade in April, while Qatar's US$9bn offering last month is the biggest deal in history by a Gulf issuer.

Qatar arguably got too greedy, given the deal was just over two times covered. Its five and 10-year tranches traded down in the days following the deal, though the shorted-dated note is now above re-offer.

Saudi Arabia's entry into the market will come as it seeks to rein in a budget deficit that hit nearly US$100bn last year. Earlier this week, the Kingdom unveiled an economic reform plan that seeks to overhaul policy. One of the key aims of the plan is to balance the budget by 2020.

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