Saudi Arabia is planning to raise as much as $17.5 billion in the biggest bond sale ever from an emerging-market nation, according to two people with knowledge of the offering, as it seeks to shore up finances battered by the slide in oil.
The government aims to sell dollar-denominated bonds due in five years yielding about 140 basis points more than similar-maturity US Treasuries, 10-year notes at a spread of about 170 basis points and 30-year securities at 215 basis points, the people said, asking not to be identified because the information is private. The proposed pricing is at least 40 basis points higher than Qatar’s similar-maturity bonds.
The sale would eclipse Argentina’s $16.5 billion offering in April as the largest from a developing nation, underlining the deepening strain on a country that has eschewed international debt markets until now. The country clocked up a budget shortfall of $97 billion last year, equal to 15 percent of its gross domestic product, prompting the government this year to cut subsidies, wages and spending.
“Boom, they went full-scale,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London who is bidding for the bonds. They “probably want to take advantage of the window before elections and a possible rate increase. Print a lot now and then see what unfolds,” he said.
The offering followed a week of presentations to prospective buyers, taking in London, Los Angeles, Boston and New York, at which officials emphasized the kingdom’s efforts to diversify the $650 billion economy away from oil. Attendees such as Gregory Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors in London, were concerned the Saudi delegation avoided discussing crude prices.
The proposed pricing offers a premium to similar maturity bonds from neighboring Qatar. Qatar’s five-year bonds were trading at a spread of 100 basis points over U.S. Treasuries 123 basis points on 10-year bonds, and 167 basis points on 30-year securities as of 3:25 p.m. in Dubai, according to data compiled by Bloomberg.
The premium isn’t high enough for some investors.
“I imagine they have enough sovereign wealth fund and cross-over investors sewn up to justify the expensive pricing,” Edwin Gutierrez, the head of emerging-market sovereign debt at Aberdeen Asset Management in London, which oversees more than $400 billion, said before the final price guidance Wednesday. “I can find cheaper bonds elsewhere.”
The sale marks the latest step in Saudi Arabia’s efforts to open up its economy, largely driven by Deputy Crown Prince Mohammed bin Salman. Among proposals are an initial public offering of Saudi Aramco, the state-run oil giant, and further measures to make the $350 billion Tadawul Stock Exchange more accessible to foreign investors.
“The program which we have heard in the roadshow over the next five to 10 years is really quite dramatic,” Richard Segal, a senior analyst at Manulife Asset Management in London, said Wednesday on Bloomberg television. “They want to really transform the economy because they realize that given how young the population is, they would need to transform away from oil anyway. There’s a lot to do and the question is how forcefully can they implement this program.”
Saudi Arabia was expected to raise about $10 billion in the sale, people familiar with the matter said last month. Citigroup Inc., HSBC Holdings Plc and JPMorgan Chase & Co. were joint global coordinators for the deal. Bank of China Ltd., BNP Paribas SA, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Mitsubishi UFJ Financial Group Inc. and NCB Capital also helped manage the issue.
The offering is the latest in a series from the six-nation Gulf Cooperation Council. Even before the Saudi sale, issuance this year rose to an unprecedented $48.3 billion. Qatar sold $9 billion in May, a Middle East record until the Saudi issue, the emirate of Abu Dhabi raised $5 billion in April, and Oman issued $4.5 billion.
Saudi Arabia had $73 billion direct government debt as of the end of August, $63 billion of which was raised from monthly sales of local currency debt. The riyal offerings and a drop in deposits have tightened liquidity in Saudi banks, prompting lenders to raise interest rates they charge one another for loans.
The three-month Saudi Interbank Offered Rate, has climbed for 15 straight months, more than trebling to 2.386 percent on Wednesday, the highest level in more than seven years, according to data compiled by Bloomberg.