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Middle East

Saudi Arabia orders foreign loan

Saudi Arabia is set to receive a benchmark sized loan from a number of international banks after a long absence from the international capital markets. Despite the size of the loan, it is unlikely to crowd out the markets, and could mark the beginning of a number of issuances from the GCC region.

Apr 25, 2016 // 5:33PM

The Kingdom is nearing the finalisation of a US$10bn loan that is expected to have a tenor of 5 years and is predicted to be priced at around 1% above the London Interbank Offered Rate (LIBOR).

The size of the loan was increased from around US$6bn to US$8bn as a result of large demand from global lenders.

The banks involved on the transaction include JP Morgan, Goldman Sachs, Morgan Stanley, MUFG, ICBC and Mizuho. Banks looking to participate were required to lend at least US$500mn.

Although a large transaction, the size of the loan is unlikely to crowd out the Middle Eastern markets.

“Saudi Arabia will not crowd out the markets with a US$10bn loan, as sovereign debt levels in the Gulf region are reasonably low. Overall the GCC (Gulf Cooperation Council) sovereigns have relatively low levels of leverage,” stated Walid Haram, Head of Emerging Market Credit Trading, CEEMEA at Nomura.

Furthermore, the current operations of foreign banks in Saudi Arabia will not affect their participation in the transaction, despite the potential increase in exposure to a single market. “International banks are unlikely to be concerned about crowding out their operations in the local markets,” Haram added.

Saudi Arabia is looking for a loan to shore up its finances following a drop in revenues as a result of falling oil prices over the last two years.

“The low price of oil is clearly having an effect on the finances of the GCC states,” noted Haram.

The Kingdom has been absent from the international capital markets for 25 years. Its return could also mark a spate of issuances from other GCC sovereigns.

“Further countries are likely to tap the debt markets as a result of the Saudi loan. Qatar already issued last year, and Abu Dhabi and Oman are expected to issue bonds soon,” Haram said.

Although the deal has been rumoured to not be hugely profitable, the willingness of banks to participate results from the potential for future work that could become available to them within the country. 

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