Middle East

Exploring the Next Frontier in the GCC Capital Markets: Saudi Arabia

Saudi Arabia’s emergence in the international capital markets, first through the sovereign’s US$17.5bn conventional bond followed months later by its US$9bn sukuk, has the potential to herald one of the biggest shifts the region’s markets have seen in years.

Sept 21, 2017 // 2:43PM

Prompted by local liquidity constraints and encouraged by the country’s ambitious and farsighted economic development plans, analysts expect a range of Saudi Arabian entities to follow the sovereign into the international capital markets to satisfy their funding needs over the next three years. What does this mean for the country’s nascent international issuers, the challenges they are likely to face, or the constitution of Saudi Arabia’s emerging hard currency credit pipeline?

We speak with Jean-Marc Mercier, Managing Director, Global Co-Head of Debt Capital Markets, Global Banking, HSBC; Aziz Ata, Managing Director, Head of Debt Financing – MENA, Global Banking and Markets, HSBC Bank Middle East; and Faisal Qadri, Managing Director, Head of Debt Capital Markets, HSBC Saudi Arabia about the country’s evolving participation in international credit markets and how the country’s borrowers are gearing up to make their debuts.

EM credit investors are very optimistic about the pipeline emerging from the Kingdom of Saudi Arabia. What kind of deal flow can we expect and what sectors do you think will move first?

Aziz Ata (AA): Historically, Saudi Arabian borrowers, have highly benefited from substantial captive local liquidity for their funding exercises in the bank and capital markets. However, we are seeing domestic liquidity tightening across both loans and bonds and as a result we may see a diverse set of issuers tapping the international markets and pools of liquidity.

Jean-Marc Mercier (JMM): It was fantastic to see the sovereign leading the way, not just because it demonstrates access and establishes a benchmark for the largest economy in the GCC, but also because of how the roadshow cleared the path for others looking to engage with global investors. The Kingdom of Saudi Arabia was, at the end of the day, engaging with people, and that engagement is what helps investors become more comfortable with the country’s story and its reform efforts, and, by proxy, a range of other entities that form important components of that story – banks, government-related entities, and corporates. The sovereign transactions were particularly important for corporates, many of which are not very well-known outside the Kingdom – let alone the region – because the need to tap into international liquidity just wasn’t there; for those entities in particular, this is a game changer, and has the potential to make their debt funding strategies much more flexible.

Faisal Qadri (FQ): Having set a benchmark and interacting with those investors, the market is now open to other issuers to move in. The first movers in my view will be those entities that are already rated and have tapped the markets before, taking advantage of new demand and broader familiarity with the growth and macro stories – for instance the large blue chip-listed companies. We are also likely to see banks move into the market, because they are already rated and have most of the issuing infrastructure set up, followed by government-related entities, which have strong implicit government support. Top-tier private sector corporates – many of which have strong balance sheets but which have never tapped the market before – will take a bit longer.

HSBC played a crucial role in the Kingdom's international capital markets debut. How would you describe the strategy taken on the issuance and what kind of questions and feedback did investors have?

JMM: The sovereign’s strategy around transforming the country is fairly well-known, especially given the extensive work the Kingdom has done in terms of communicating Vision 2030, but the roadshow was an important exercise in allowing investors the opportunity to dive into that strategy in more depth, and to help build trust between the investor community and the Kingdom. Questions from investors during the first roadshow largely focused on the government’s budget and spending priorities, with some interest in the country’s commitment to the US dollar currency peg. The roadshow included very senior representatives from across the Saudi Ministries, Saudi Arabian Monetary Authority (SAMA), the CMA and the Stock Exchange (Tadawul), and adopted a two-way Q&A structure, giving all parties the opportunity to probe quite deeply into areas of interest. Hosting several roadshows in the same locations also helped bolster the relationship between the sovereign and investors and gave investors the opportunity to understand Saudi Arabia’s strategy; it was also important for cultivating investor trust in that strategy and the country’s policy makers. At the end of the day, this was a truly global transaction, something evident in the book; it included strong participation from across the four major time zones, which meant that we weren’t just relying on US and local accounts.

Many of the country's entities likely to issue in the international markets will be first time issuers. What kind of challenges might they encounter on their capital markets journey? How do you expect the high volume of new issuers to affect pricing dynamics of Saudi credit?

FQ: We are seeing entities in Saudi Arabia move to set up the necessary internal infrastructure to support international issuances: bolstering their investment relations teams; improving transparency; introducing new processes around disclosure; secure ratings from recognised credit rating agencies. These initiatives don’t necessarily conclude overnight, but we are extremely encouraged by what we have seen so far.

AA: We feel the majority of these entities will be able to go through these processes fairly efficiently. Transitioning from the domestic markets to the international market, while it may require some learning process, is not necessarily a huge challenge, and the GCC issuers have been very nimble to changing market conditions in the past; we expect that level of adaptability to remain consistent.

Saudi Arabia's energy diversification efforts are estimated to create thousands of new jobs and dozens of new projects over the coming decade. To what extent do you see renewable energy driving green transactions? Are the skills or the know-how to put these transactions together present on the ground in Saudi Arabia?

JMM: We absolutely see this driving green transactions – but not exclusively. We have already seen the region’s first green bond – NBAD’s US$587mn 5-year trade earlier this year. Repsol’s benchmark-sized green bond launched in May proves that almost any company can structure and execute these kinds of transactions. I think it’s also important to point out that trades like this only form a small component of the broader sustainable finance pipeline; we also see sustainable and social housing driving sustainable finance in Saudi Arabia among other regions. The Kingdom has been fairly progressive when it comes to pushing energy efficiency and sustainability initiatives, which form a central part of its Vision 2030 plan.

FQ: Many of these transactions have never been done before in Saudi Arabia and are still quite new in the broader global context. HSBC is on the ground in Saudi Arabia sharing its expertise as an international lender and a specialist in sustainable finance. It takes a considerable amount of dialogue and time to understand these kinds of transactions at every level of an organisation, but we are privileged to be part of that process. Many issuers will likely try to become more familiar with conventional instruments before moving into the sustainable finance space.

This article was developed in partnership with HSBC

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