Aramco's $12 Billion Bond Deal Fizzles as Sell-Off Extends

(Bloomberg) -- The bonds issued by Saudi Aramco in this week’s unprecedented offering sank for a second day, marking a quick sell-off that calls into question the depth of the deal’s $100 billion of investor orders.

Risk premiums on the oil giant’s $12 billion of bonds climbed amid a mild decline in oil prices and rising yields on the company’s sovereign parent. For the most actively traded piece of the offering -- $3 billion of 3.5 percent bonds due in 2029 -- the extra yield investors demanded to own the debt widened to as high as 1.2 percentage points more than U.S. Treasuries in trading Thursday, according to the Trace bond-price reporting system. That’s up from a spread of 1.05 percentage points when the deal priced Tuesday.

The trading sheds light on a long-held reality in the corporate bond market: that orders on highly anticipated deals are often padded by investors who fear losing out on allocations. It can create a “vicious cycle” that inflates demand, said Lon Erickson, a portfolio manager at Thornburg Investment Management.

The sell-off is “a little bit surprising given the supposed over-subscription,” he said in an interview Thursday. “You can’t trust the final order book.”

Aramco issued the debt to investors globally after, at one point, receiving more than $100 billion of orders, people with knowledge of the deal said at the time. That allowed the energy giant to borrow at a lower yield than its sovereign parent, even though credit-ratings firms assigned the same grades as the kingdom’s debt.

About half the deal was allocated to U.S. investors, according to the banks managing the sale. European investors took 24 percent of the offering, with investors in Asia and the Middle East lending the rest. Asset managers like mutual funds and exchange-traded funds took down 60 percent of the offering. Banks and insurers and pension funds received 15 percent and 14 percent of the deal, respectively.

The way banks divvy up hot corporate bond sales has long been criticized by investors and even has in the past come under the scrutiny of the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.

Read more on the controversy behind bond syndications here

“When people see big order books, they pile in thinking that there’s fast money to be made,” said Scott Kimball, a Miami-based fixed-income portfolio manager at BMO Global Asset Management. But if they get a small allocation that would fail to generate meaningful returns, he said, those investors decide to sell.

Thursday’s declines come as oil prices in New York fell from a five-month high. Crude slipped 1.2 percent Thursday to $63.82 per barrel.

JPMorgan Chase & Co. and Morgan Stanley managed the bond sale along with Citigroup Inc., Goldman Sachs Group Inc., HSBC Holdings Plc, and NCB Capital Co.

--With assistance from Brian Smith, Laura Benitez, Paul Cohen and Lyubov Pronina.

To contact the reporters on this story: Claire Boston in New York at cboston6@bloomberg.net;Jeremy Hill in New York at jhill273@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Shannon D. Harrington, Boris Korby

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