Proposed Saudi bond may set all-time record
Although the bond issue hasn't happened yet, reports from earlier this month show Saudi officials dishing out news to potential investors about a very big bond deal.
Experts suggest Saudi Arabia is looking at demand and how a bond from the kingdom might compare with others from countries like Chile and Peru, as well as Mexico.
As for the size of the bond issue, such a move -- if pursued by Saudi Arabia -- would top the $16.5 billion bond put out by Argentina some months ago.
Analysts expect that the Saudi bonds will be highly rated by ratings agencies: A1 by Moody's and AA by Fitch.
Within the overall bond issue, Saudis would be offering three different tranches to attract investors.
“They are issuing one type of bond on the same day with three different maturities of five, 10 and 30 years and different interest rates,” Dr. Hossein Varamini recently told Gulf News Journal.
Varamini is Turnbull-Jamieson chair, professor of finance and international business director of the International Business Program at Elizabethtown College in Pennsylvania.
One advantage that Saudi Arabia has over others is a 50bp premium over bonds from its neighbor, Qatar.
“Generally, bonds with longer maturities have slightly higher rates (basis points) to provide financial incentives for the investors to commit their funds for longer terms,” Varamini said. “Saudi’s bonds offer slightly higher basis points relative to bonds from other Gulf states, and even more premiums relative to the U.S. Treasury securities so that they could attract investors to their bonds.”
Varamini said the bonds could be a way for the Saudi government to deal with major budget deficits such as those experienced in recent years.
“The (Saudi) government has implemented a number of new strategies in recent months to minimize the effect of the revenue shortfall,” he said. “Their goal is to diversify their economy, rely less on oil revenue and become a more active member of the global capital market. Selling government bond is in line with what many other Gulf States are doing to raise more money in the global capital market. By offering a higher premium-interest rate on their bonds, the Saudi government is hoping to attract investors to its bonds.”
It is important to note that the Saudi government is issuing these bonds in U.S. dollars, rather than its local currency. Issuing dollar-denominated bonds by a foreign government will help sell to global investors.
Varamini also suggested the Saudi consideration of a bond issue may be strategically timed.
“The timing of issuing this type of bond is interesting as they expect a higher interest rate in the U.S., both because of the upcoming election and the likelihood of a boost in the interest rate by the Fed (Federal Reserve Bank) in the next couple of months,” Varamini said. “They want to raise funds before the potential to pay a higher interest rate on their borrowing.”