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Saudi Arabia Borrow Big as Oil Revenue Dries up



Why are they borrowing so much? 

Saudi Arabia has stated to investors the risks it faces due to low oil prices. The details were included in a prospectus ahead of its scheduled Dollar bond issue. The three-tranche deal could potentially raise USD 15bn for the Kingdom. Shrinking Oil Incomes for the GCC states is a considerable issue with many members borrowing large sums to fill cash shortfalls. Bahrain recently completed the process with a USD2bn dual tranche which was well oversubscribed (USD7bn). One of the tranches was Sukuk which you can read about here: Is Shrinking Oil Income Prompting Sukuk Issuance?

The Saudi government expects the budget deficit for the year to be 326 billion Saudi riyals (USD87bn), or 13.5% of nominal gross domestic product (GNP). Saudi Arabia estimate its oil reserves are expected to last 70 years considering the average production level of about 10.2 million barrels a year. The deal comes at a time of strength for EM credit and oil, with funds still seeing strong inflows which should help to absorb the new bonds. However, newly-issued GCC Eurobonds could suffer as investors switch into the probable higher yielding Saudi bonds.

 

Who is in on the Deal? 

The Kingdom of Saudi Arabia is rated A1 by Moody’s (stable) and AA- by Fitch (negative). It has mandated Citi, HSBC and J.P. Morgan as Joint Global Coordinators, to organize a series of fixed income investor meetings commencing this Wednesday, 12th October 2016. In addition, Bank of China, BNP PARIBAS, Deutsche Bank, Goldman Sachs, Morgan Stanley, MUFG, and NCB Capital, together with the Joint Global Coordinators, are mandated as Joint Lead Managers and Joint Bookrunners. Subject to market conditions, a debut Rule 144A/Reg S Senior Unsecured USD benchmark offering across 5, 10 and 30 year maturities under the Kingdom's GMTN Programme will follow. FCA/ICMA Stabilisation.



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