Aramco bond sale to close Wednesday

Andrew Cummings
April 12, 2019

State-owned Aramco is expected to raise more than $10 billion from the deal, which will be priced later on Tuesday and is seen as a gauge of potential investor interest in the Saudi company's eventual initial public offering.

Saudi Arabia's Energy Minister Khalid al-Falih said on Monday that the bond issue to raise $10 billion towards Aramco's purchase of a controlling stake in chemicals behemoth SABIC was already over-subscribed by three times.

Demand for the paper was the largest for emerging markets bonds since an orderbook value of more than $52 billion for Qatar's $12 billion deal previous year.

But he added: "The thing is, they are part of Saudi Arabia, they are a government arm".

"The bond issue is at a very critical stage".

Both Fitch Ratings and Moody's Investors Service assigned Aramco the fifth-highest investment-grade rating, the same as Saudi sovereign debt, but lower than oil majors Exxon Mobil, Royal Dutch Shell and Chevron.

Saudi Aramco's debut global bond issuance has generated over $85 billion-worth of orders from investors, Bloomberg has reported.

The bonds are divided into tranches of three, five, 10, 20 and 30 years.

"The success of this bond issue will be the litmus test and a crucial precursor for the anticipated Aramco IPO within the next two years", said Salah Shamma, head of investment, MENA equities, at Franklin Templeton.

This ultimately means that Aramco has emerged as the most profitable Company in the World, bigger than Alphabet, Amazon and Apple combined!

Having made core earnings of $224 billion past year and with $86 billion in free cash flow at the end of 2018, Aramco does not need to borrow. When Qatar, a rival Middle East nation, sold $12 billion in bonds earlier this year, it got a record $50 billion in orders, evidence of investor appetite for debt of rich, oil-producing nations.

The bond will create a United States dollar curve for the company, and also finance the US$69bn acquisition of 70% of Saudi Basic Industries Corp (SABIC), a petrochemical company from the kingdom's wealth fund. "Just a short while ago our acquisition of SABIC would have been unthinkable, because it was seen as a national champion", he said.

Many see the deal as a relationship building exercise with worldwide investors ahead of its planned IPO, which was scheduled for previous year but then postponed to 2021. The offering also includes a three-year floating rate bond.

And from a purely investment standpoint, financial analysts seem to think that hitting the debt market makes more sense for Aramco than an initial public offering, which has been in the works for some time and much-delayed over issues of transparency and valuation.

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