Saudi Arabia Joins Middle East Bond Binge to Boost Finances

(Bloomberg) -- Saudi Arabia sold $7 billion of bonds on Wednesday as it followed other Middle Eastern states that have issued foreign debt to bolster their finances in the face of the coronavirus pandemic and plunging energy prices.

The offering marked the second time this year the world’s largest oil exporter has turned to international capital markets, as Crown Prince Mohammed bin Salman pushes ahead with plans to open up the economy and wean it off crude. In December, the government sold a $29 billion stake in energy giant Saudi Aramco through the largest initial public offering in history.

“It doesn’t have a choice but to borrow from the bond market,” said Richard Segal, a senior analyst at Manulife Investment in London. “With oil prices lower and soon production lower, and an economic support package recently in place, the government’s deficit and financing requirements have jumped.”

The deal was heavily oversubscribed, with investors placing around $54 billion of orders, according to a person familiar with the matter. The kingdom sold $2.5 billion of bonds maturing in 5.5 years, $1.5 billion of debt due in 10.5 years and $3 billion of 40-year notes.

The longest tranche was priced with a yield of 4.55%, down from the initial talk of 5.15%. The shortest securities yield 2.94% and the middle ones 3.34%.

Budget Strains

Citigroup Inc., Goldman Sachs Group Inc. and HSBC Holdings Plc managed the sale. It came after Qatar and Abu Dhabi attracted larger-than-normal demand from global bond investors last week, raising $17 billion between them. Israel issued $5 billion at the beginning of the month.

Saudi Arabia’s economy, the biggest in the region, is coming under strain after Brent crude prices sank about 50% this year to under $30 a barrel. While the kingdom has a low ratio of debt to gross domestic product, it needs an oil price of roughly $80 to balance its budget. Its deficit will more than double in 2020 to almost 10% of GDP, according to Moody’s Investors Service.

It also has smaller buffers than when oil prices last crashed in mid-2014. Foreign reserves have declined to less than $500 billion from roughly $730 billion then.

The government plans to raise its debt ceiling from 30% to 50% of economic output and said it could borrow as much as 100 billion riyals ($26.6 billion) this year.

“Oil prices are a significant drag on the Saudi economy,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. Still, “the current environment affords an opportunity to pick up a solid investment-grade sovereign at valuations that are attractive versus historical spread levels.”

The government has the fifth-highest rating of A1 from Moody’s.

Saudi Arabia last came to the international debt market in January, raising $5 billion. Finance Minister Mohammed Al-Jadaan said the kingdom may issue an additional $4 billion in foreign bonds this year, though that was before oil prices plunged. An agreement among OPEC+ producers on Sunday to cut supply by around 10 million barrels a day has failed to lift prices this week.

“At this oil price level, there is pain for everyone, and it is not sustainable,” said Mohieddine Kronfol, the chief investment officer for Middle Eastern and North African fixed income at Franklin Templeton. “While we are budgeting for a lower oil price for longer, we do expect to see a new oil price regime to emerge and think we could be back over $45 per barrel before year end.”

Franklin Templeton raised its estimate of 2020 bond sales by governments and companies in the Gulf Cooperation Council to $105 billion, from an earlier forecast of $90 billion.

The recent Eurobond deals from Middle Eastern borrowers, as well as others such as Indonesia, indicate a resurgence of investor appetite for high-rated debt following last month’s global sell-off, which all but closed the market for developing-nation governments.

©2020 Bloomberg L.P.