Wednesday, 24 April 2019

Aramco IPO on hold as Saudi eyes other sources of cash

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Sabic deal seen as preferred way to fund Vision 2030 programme

Saudi Aramco

The eagerly awaited IPO of Saudi Aramco, billed as the biggest stock flotation in history, has been kicked into the long grass as the kingdom focuses on raising cash for its Vision 2030 goals by other means.

First announced in early 2016, the listing was a central tenet of Crown Prince Mohammed bin Salman’s plans to overhaul the economy and fill a gaping hole in state finances. The sale of a 5% stake was expected to raise around US$100bn, four times more than any previous IPO.

JP Morgan, Morgan Stanley, HSBC, Moelis and Evercore were mandated to prepare for the listing. Bankers on the deal say that, while ties have not been formally severed, the deal has come to a complete halt in recent months as Riyadh focuses on other sources of raising cash.

Aramco chairman Khalid Al Falih said “speculation” that the IPO had been cancelled was wrong, adding that “the government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum”.

It initially said the listing would happen in 2018. In recent months it indicated the deal would more likely come in 2019. But now the deal has been delayed indefinitely.

“This timing will depend on multiple factors, including favourable market conditions, and a downstream acquisition which the company will pursue in the next few months,” said Falih in a statement, referring to Aramco’s plan to buy a US$70bn stake in Saudi Arabia Basic Industries Corporation.


Bankers say the Sabic deal has fast become the preferred way for Riyadh to raise funding for its vast Vision 2030 programme, which will see the country’s Public Investment Fund invest heavily to develop new industries and jobs to help diversify away from its current dependence on oil.

The PIF, Saudi’s sovereign wealth fund, was to be the recipient of any money raised from an Aramco listing. But, with a projected valuation falling well short of the crown prince’s publicly stated target of US$2trn and the process of disentangling Aramco from the state proving complex, another plan was sought.

Sabic is the solution: PIF owns 70% of the petrochemical manufacturer, and Aramco’s purchase of that stake will provide the sovereign wealth fund with much of the funding it needs without having to list the oil giant.

In recent days, PIF has also signed a deal to borrow US$11bn from banks - almost double the US$6bn that it had been seeking when talks first began. It is the first ever commercial loan for PIF. It is extremely rare for a sovereign wealth fund to take out a syndicated loan.

“In that triangle of Sabic-Aramco-PIF, there is a lot going on,” said one banker close to the Aramco IPO, who said that some banks working on the listing had been diverting resources to the PIF loan in recent weeks, in response to Riyadh’s changed priorities.

More debt deals are expected, with Aramco expected to fund its purchase of the Sabic stake in international bond markets. It has already been testing out appetite: last year, it sold SR11.25bn (US$3bn) of sukuk in a private placement.


Still, while fulfilling PIF’s funding needs, the prioritisation of the Sabic acquisition over an IPO of Aramco has angered many banks that have lavished Saudi Arabia with money and attention ever since it unveiled its Vision 2030 programme.

Banks have diverted resources towards the company and increased lending, in the hope of cementing relationships that might one day lead to sizeable fees on large transactions. Riyadh has indicated it might privatise more than a hundred state-owned entities.

Ironically, that flood of capital into Saudi - mostly via bank loans - has lessened the need to tap capital markets.

The latest hiccup could lead to some banks reconsidering their commitment – especially given the opportunity cost, not least regarding lost business in Qatar, which is engaged in a diplomatic rift with Saudi Arabia that has seen the two countries sever ties.

“Many people had given up on Qatar - where there is a wallet,” said one senior banker in the region. “Given the Saudis keep taking things off the table that they said they were going to do, they need to be careful.”

“Everyone is getting very excited, putting boots on the ground,” he said. “That is very costly. Things are getting delayed, things are getting cancelled. The monetisable wallet that was considered to be on offer two years ago is getting redefined.”

“Banks need to understand what the fee scale is, what the wallet is.”


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