Aramco treads carefully on Saudi ties as it markets debut bond

LONDON/NEW YORK/DUBAI: For Saudi Aramco and its advisers, a debut international debt issue that could raise well over $10 billion presents a key challenge – how to forge an identity as a state-owned major while in the same league as the likes of Exxon Mobil and Shell.

At stake is the likely multi-million dollar difference in interest payments over coming years between its standing as an independent international corporate and one tied closely to the host kingdom whose oil it ships to global markets.

Having said in January it was planning its first ever international debt issue, Aramco has been meeting with investors in Asia, Europe and the United States to promote the bonds. It hasn’t commented on what was said during the sessions.

Moody’s and Fitch said Aramco’s rating was capped by their assessments of Saudi Arabia, but unconstrained by its sovereign links it would have achieved ratings that would put it at par with the likes of Exxon, the world’s largest listed oil company.

But bankers arranging the roadshow have tried to convince crossover buyers, both emerging markets funds and pure investment-grade players, about Aramco’s merits, marketing the company as having characteristics which put it above the credit worthiness of Saudi Arabia.

“We would look at it its rating against the sovereign, but there’s a lot of interest from outside the emerging markets universe from investors looking at it against international oil majors from the U.S. and Europe,” said Jan Dehn, head of research at Ashmore Group.

Previously reluctant to do so, the oil major was forced to disclose its financials to obtain public credit ratings ahead of the debt sale.

SOVEREIGN DILEMMA

Aramco’s financial data, published earlier this week, showed it generates by far the biggest profit of any company in the world, boasting core earnings of $224 billion and a net income of $111 billion.

These figures have practically guaranteed plentiful of demand for Aramco’s issue, expected next week.

Saudi Energy Minister Khalid al-Falih said earlier this year Aramco would raise around $10 billion, but the final amount will be determined by market demand.

Aramco is largely expected to offer investors a slight premium to what Saudi government bonds are offering, as that is generally the case with government-owned entities.

But the mismatch between its rating and its staggering finances has presented investors with a pricing dilemma.

“It has more of a double-A credit profile than the single-A rating it has,” said Samy Muaddi, emerging markets portfolio manager at T. Rowe Price.

“But you have to keep in mind that if the sovereign were to get into trouble, there are some financial resources, whether they be through royalties, taxes, or dividends, that could be taken from Aramco.”

Aramco has insisted on its independence over the past few days. In an online presentation seen by Reuters, a company executive said that even when oil prices declined to $45 a barrel in 2016, the kingdom remained committed to Aramco’s governance framework to safeguard its independence.

“The government borrowed on its balance sheet for its budget needs with no ask of or interference to Aramco,” the presentation said.

INVESTMENT STRATEGY

Aramco said last week it had agreed to buy the 70 percent stake held by the Saudi Public Investment Fund (PIF) in Saudi Basic Industries (SABIC) for $69.1 billion, one of the largest deals in the global chemicals industry.

While the firm said in the presentation the bonds would not be used to fund the acquisition, many investors believe the debt plans are linked to the purchase, which will give PIF, the main vehicle for Crown Prince Mohammed Bin Salman’s plan to diversify the Saudi economy away from oil, cash to push through its investment strategy.

“There is a clear connection with the sovereign, it is highly coordinated policy, particularly in terms of production targets and in some cases the price of oil and where they want to sell oil,” said Ray Singh, vice president, diversified fixed income at Eaton Vance.

According to Ashmore’s Dehn the “seamless” relationship between Aramco and the government is positive for investors.

“I would imagine they [Aramco] would be coordinating with the Saudi debt management office as the government and Aramco are pretty similar issuers and Aramco’s issue would cannibalize the government to some extent and reduce the Saudi government weighting on the JPM index.”

Some bankers and fund managers expect Aramco to issue up to $30 billion or $40 billion in bonds, but company representatives have not discussed a firm target during the roadshow.

This would allow it to focus on obtaining the right pricing without creating larger supply expectations that would impact its cost of borrowing in future issues.

Also, had Aramco announced an even larger transaction than $10 billion, this could have put some pressure on Saudi Arabia’s debt curve, as some investors would switch Saudi sovereign paper for the upcoming Aramco securities.

“But more importantly it would change the narrative Aramco put forward around the SABIC acquisition and the governance framework with the government as shareholder,” said Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA Fixed Income at Franklin Templeton Investments.

“A large bond deal may imply a transfer to PIF as the main motivation rather than the opening up of Aramco.”