Even $10 Billion Aramco Megabond Can't Fix Gulf-Debt Hunger

(Bloomberg) -- A $10 billion corporate-bond offering might be hard for investors to digest in some emerging markets. Not so in the Gulf, and not when the notes are being sold by the most profitable company on the planet.

“The appetite for ultra-high investment grade, particularly from the Gulf Cooperation Council where spreads are still wide relative to developed markets, is very strong,” said Patrick Wacker, fund manager for emerging-markets fixed income at UOB Asset Management Ltd. in Singapore. “If Ecuador or Indonesia came with these sizes, that would cause indigestion.”

Even $10 Billion Aramco Megabond Can't Fix Gulf-Debt Hunger

Though a contender for the highest rating from Moody’s Investors Service, Aramco’s state-owned status means it shares Saudi Arabia’s A1 sovereign credit score, which is five steps below the top grade. The yield on the nation’s 2029 debt is similar to that of lower-ranked Colombia and Panama, which could mean attractive pricing for a company that turned a $111.1 billion profit last year if the bonds are, as expected, placed at a small premium to the sovereign.

The inclusion of the Gulf region’s notes in JPMorgan Chase & Co.’s emerging-market indexes fueled a record rally in the first quarter and yields on debt of the six-nation Gulf Cooperation Council are still juicy compared with developing-nation peers. The Saudi 2029 bonds rose for a third day on Thursday, reducing the yield 1 basis point to 3.81 percent, the lowest since the notes were sold in January.

“One gets a company with an ‘AAA’ balance sheet at ‘A’ yields,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “Aramco is 100 percent owned by the government and given its importance to the Saudi economy, tantamount to Saudi sovereign risk.”

Read more: Five Charts to Help Unravel Aramco’s Bond Yield

Governments and companies in the Gulf sold about $33 billion of bonds this year, accounting for only 6 percent of the total amount raised in emerging markets worldwide. Saudi Arabia’s $7.5 billion bond sale in January attracted $27.5 billion in bids, while Qatar’s $12 billion offering was almost three times subscribed.

Here’s what investors are saying about the Aramco deal and bonds in the Gulf:

Schubert at Bank of Singapore:

  • Aramco will likely offer its bonds at a yield premium of 10 basis points to 15 basis points to Saudi government debt initially; the spread will likely “disappear” over time and Aramco should trade at a lower yield to the sovereign
  • Over the past several years, Asian investors have been steadily investing in GCC sovereign paper because of the “incremental yield advantage” to both U.S. investment grade and similarly-rated Asian debt such as China, South Korea and Taiwan
  • Many of the countries in the Gulf region have solid investment-grade ratings, and many companies have “substantial government ownership with a proven track record of support when needed”
  • “Technicals in the region tend to be strong, with a robust local retail bid, and the historic correlation with other geographic regions tends to be low, providing some diversification benefit during times of emerging-market volatility”
  • Bank of Singapore owns bonds sold by governments and companies from the region, including Dubai, Abu Dhabi, Kuwait, Bahrain and Saudi Arabia

Carl Wong, the head of fixed income at Avenue Asset Management Ltd. in Hong Kong:

  • With the Federal Reserve’s lower-for-longer stance on interest rates, there is a natural tendency by investors to look for longer-dated investment-grade debt, especially bonds from the Middle East and North Africa region as they offer “good relative value and better liquidity over Asian sovereign bonds”
  • “Aramco comes in at the right time. It has been profiled as the most profitable company in the world and obviously that title alone attracts good attention from the market”
  • Aramco’s deal will do well as “the underlying credit quality should be better than actual rating suggests, due to the sovereign cap”
    • “I won’t be surprised if it trades inside the sovereign post issue”

Maxim Vydrine, a money manager at Amundi Asset Management:

  • Aramco’s management gave a “convincing” presentation
  • “Traditional EM approach would be to price it with a spread to the sovereign curve, however comparing to where the bonds of the global oil majors are trading, should entail tighter pricing, potentially inside the sovereign curve”
  • “We would expect issue to focus more on pricing, rather than the size of the transaction”

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