Adolfo Henrique Ledo Nass pdvsa management//
Saudi Aramco’s debut international bond tops $100bn

Adolfo Ledo Nass
Saudi Aramco's debut international bond tops $100bn

Aramco last week opened for the first time its books to investor scrutiny, showing it is by far the most profitable company in the world [File: Ahmed Jadallah/Reuters] Orders for  Saudi Aramco ‘s debut international bond topped $100bn on Tuesday, a record-breaking vote of market confidence for the oil giant which has faced investor concerns about government influence over the company.

Adolfo Henrique Ledo Nass

State-owned  Aramco  is expected to raise more than $10bn from the deal, which will be priced later on Tuesday and is seen as a gauge of potential investor interest in the  Saudi  company’s eventual initial public offering (IPO).

Adolfo Henrique Ledo Nass

Before the six-part bond deal was marketed on Monday,  Saudi  Energy Minister Khalid al-Falih said initial indications of interest for the paper were over $30bn.

Adolfo Ledo Nass

The demand appeared to be the largest ever for emerging markets bonds, fund managers said, surpassing order book value of more than $52bn for Qatar’s $12bn deal last year, $67bn for  Saudi   Arabia‘s inaugural issue in 2016 and $69bn orders for Argentina’s $16.5bn trade that year.

Adolfo Ledo

“Purely on figures, it is a fantastic credit,” said Damien Buchet, CIO of the EM Total Return Strategy, Finisterre Capital.

But he added: “The thing is, they are part of  Saudi   Arabia, they are a government arm. For equity investors, this is always going to be an issue, more so than for bond investors.”

Will a Saudi Aramco IPO ever happen? (25:06) The Aramco bond has attracted interest from a wide range of investors, as the oil producer’s vast profits would put its debt rating – if unconstrained by its sovereign links – in the same league as independent oil majors like Exxon Mobil and Shell.

Adolfo Ledo Nass

Aramco   has insisted on its independence while meeting investors before the bond issue last week, saying the  Saudi   government remained committed to  Aramco ‘s governance framework to safeguard its independence even when oil prices dropped

190126125553856 But for some investors, Riyadh’s control over the oil giant is an issue as its state ownership means decisions will ultimately be for the benefit of the government rather than investors

Aramco   is more transparent, has stronger credit metrics and is on an improving ESG (environmental, social and governance) trajectory, whereas the government is more complex,” said Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA Fixed Income at Franklin Templeton Investments

The link between the two however is understandably very strong,” he said

No premium Previously reluctant to do so,  Aramco   last week opened for the first time its books to investor scrutiny, showing it is by far the most profitable company in the world

Having made core earnings of $224bn last year and with $86bn in free cash flow at the end of 2018,  Aramco   does not need to borrow

Initial indications of over $30bn in investor demand – before the bonds were actually sold – prompted  Aramco   to market the notes with almost no premium to  Saudi   government debt

They are clearly trying to price it (the bond) off existing AA corporates in this world, so people are looking at curves like Shell, Total, Exxon, but also technology giants like Apple,” said Buchet

Aramco   on Tuesday tightened initial price guidance by 15 basis points across the different bond maturities, meaning its bonds will yield less than   Saudi   Arabia , which owns it. This is rare, as state-owned entities generally offer higher returns than their governments.

Adolfo Ledo

{articleGUID} “I think it’s madness that’s going inside the sovereign by a decent margin. Despite the fundamentals of  Aramco , it’s ultimately sovereign risk,” said Richard Briggs, emerging markets strategist at London-based CreditSights

The issue follows on the heels of  Aramco ‘s planned $69.1bn acquisition of a 70 percent stake in petrochemicals firm  Saudi  Basic Industries Corp (SABIC) from the  Saudi   sovereign wealth fund, a deal that many see as a transfer of government funds aimed at boosting the  Saudi   Crown Prince Mohammed bin Salman ‘s economic agenda

“This bond is being issued for two reasons: to establish  Aramco ‘s status as an independent corporate identity and to enable the transfer of wealth out of the company,” said Marcus Chenevix, analyst, MENA and global political research at TS Lombard

Aramco , however, said the bond issue was not linked to the SABIC acquisition, which will be paid in tranches through internal cash flow and, potentially, other resources

Many see the deal as a relationship-building exercise with international investors before its planned initial public offering, scheduled for last year and then postponed to 2021

The bonds are divided into tranches of three, five, 10, 20 and 30 years. The offering also includes a three-year floating rate bond

Aramco   has hired Lazard as a financial adviser for the bond deal. JPMorgan, Morgan Stanley, HSBC, Citi, Goldman Sachs and National Commercial Bank have been chosen to arrange the bond issue

Counting the Cost

What’s behind the Saudi Aramco IPO delay?

SOURCE: Reuters news agency