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Middle East

Saudi deal to facilitate wider Middle East bond issuance

Saudi Arabia has finally come to the market with its long awaited bond, pipping Argentina’s record with a US$17.5bn deal – the largest-ever issuance from an emerging market entity. The bond came in tighter than some expectations, and will facilitate further bond issuances from Saudi corporates and across the Middle East.

Oct 20, 2016 // 4:31PM

The Saudi sovereign issued US$17.5bn across 5-year notes at UST+135bp to yield 2.58%, 10-year notes at UST+165bp to yield 2.83% and 30-year notes at UST+210bp to yield 4.62%. Citigroup, HSBC and JP Morgan led the bond sale, with Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, MUFG and NBC Capital joining in additional roles.

Final pricing came in tighter than IPTs by 25bp for the 5-year, 20bp for the 10-year and 25bp for the 30-year deal. This followed an orderbook that reached around US$67bn consisting mainly of US and Asian investors.

“Pricing has come in tighter than my original expectations,” said Anita Yadav, head of fixed income research at Emirates NBD, adding however that on a relative basis it looks to be in the fair value range.

“Given that the Saudi bond was mostly placed in the hands of international investors, a lot of local investors are trying to get their hands on it which has left the country’s bonds well bid in the secondaries,” she said.

The substantial level of demand – including unmatched demand – means there may also be scope for further tightening in the secondary market, and reinforces the fact that Saudi Arabia appears to have stolen the limelight with its issuance – to the point where investors are not even looking at other regional buys.

“Right now, secondary market trading is all about Saudi government bonds. Not much is happening in the rest of the space,” Yadav stated.

Despite the spotlight focussing firmly on Saudi Arabia, debt from across the GCC in particular will likely benefit from elevated investor demand.

The tight pricing achieved on the Saudi bond is positive for local GCC bonds, as spreads in the secondary market on the rest of these bonds will also tighten. A senior banker who worked on the deal noted that pricing across Middle Eastern debt was now around 10bp tighter than before Saudi Arabia launched its deal.

Slightly tighter spreads, combined with the fact that across the GCC, sovereigns still have sizeable budget deficits that need funding means issuance from the region is likely to continue, and could lead borrowers to favour bonds over syndicated loans due to improving pricing conditions and increased investor appetite.

Yada added that Saudi corporates, particularly the large ones like SECO, SABIC, Saudi Telecom and Aramco will also be encouraged to issue more debt in the international bond market to fund their ongoing capex needs – with the markets are now expecting numerous corporate issuances. 

Middle East Deals

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