Aramco sets record with $100 billion demand for landmark bond

DUBAI (Reuters) – Orders for Saudi Aramco's debut international bond topped $100 billion on Tuesday, an archive breaking vote of market confidence to the oil giant that’s faced investor concerns about government influence in the company.

State-owned Aramco is predicted to boost greater than $10 billion from the deal, which is to be priced afterwards Tuesday and is also seen as gauge of potential investor need for the Saudi company's eventual initial public offering.

Before the six-part bond deal was marketed on Monday, Saudi Energy Minister Khalid al-Falih said initial indications of interest for that paper were over $30 billion.

Demand appeared to be the biggest ever for emerging markets bonds, fund managers said, surpassing orderbook value of above $52 billion for Qatar's $12 billion deal last year, $67 billion for Saudi Arabia's inaugural issue in 2019 and $69 billion orders for Argentina's $16.5 billion trade that year.

"Purely on figures, it’s really a fantastic credit," said Damien Buchet, CIO with the EM Total Return Strategy, Finisterre Capital.

But he added: "The simple truth is, they are a part of Saudi Arabia, they’re a government arm. For equity investors this can be going being a challenge, more so than for bond investors."

The Aramco bond has attracted interest at a massive amount investors, because oil producer's vast profits would put its debt rating – if unconstrained by its sovereign links – in the same league as independent oil majors like Exxon Mobil (NYSE:XOM) and Shell (LON:RDSa).

Aramco has insisted on its independence while meeting investors ahead of the bond issue a couple weeks ago, saying the Saudi government remained focused on Aramco’s governance framework to shield its independence regardless of whether oil prices dropped.

But for a few investors Riyadh's treating the oil giant is a problem since it’s state ownership means decisions will swiftly be for any benefit from the federal government as opposed to investors.

"Aramco is much more transparent, has stronger credit metrics and is also by using an improving ESG (environmental, social and governance) trajectory whereas the us government is a bit more complex," said Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA Fixed Income at Franklin Templeton Investments.

"The hyperlinks forwards and backwards however is understandably very good," he said.

NO PREMIUM

Previously often do this, Aramco last week opened the first time its books to investor scrutiny, showing it really is by far the most profitable company on the planet.

Having made core earnings of $224 billion not too long ago together with $86 billion in free cash flow soon after 2018, Aramco doesn’t need to borrow.

Initial symptoms of over $30 billion in investor demand – prior to bonds were actually sold – prompted Aramco to showcase the notes with hardly any premium to Saudi government debt.

"They are really clearly wanting to price it (the hyperlink) off existing AA corporates these days, so folks are checking out curves like Shell, Total, Exxon and also technology giants like Apple (NASDAQ:AAPL)," said Buchet.

Aramco on Tuesday tightened initial price guidance by 15 basis points along the different bond maturities, meaning its bonds will yield a lot less than Saudi Arabia, which owns it. This is often rare, as state-owned entities generally offer higher returns than their governments.

"I believe it's madness that's it's going into the sovereign by way of a decent margin. Regardless of the fundamentals of Aramco, it's ultimately sovereign risk," said Richard Briggs, emerging markets strategist at London-based CreditSights.

The issue follows within the heels of Aramco's planned $69.1 billion acquiring a 70 percent stake in petrochemicals firm Saudi Basic Industries Corp (SABIC) from your Saudi sovereign wealth fund, an offer that numerous see as a change in government funds targeted at boosting the Saudi Crown Prince's economic agenda.

"This bond will be issued for 2 reasons: to produce Aramco's status being an independent corporate identity also to allow change in wealth right out of the company," said Marcus Chenevix, analyst, MENA and global political research at TS Lombard.

Aramco, however, said the hyperlink issue wasn’t from the SABIC acquisition, which is to be paid in tranches through internal net income and, potentially, other resources.

Many observe the deal for a relationship building exercise with international investors in front of its planned dpo, scheduled for last year and postponed to 2021.

The bonds are separated into tranches of three, five, 10, 20 and 30 years. The offering also includes a three-year floating rate bond.

Aramco has hired Lazard as financial adviser with the bond deal. JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), HSBC, Citi, Goldman Sachs (NYSE:GS) and National Commercial Bank are already chosen to make the text issue.