Saudi Arabia’s plans to open up its capital markets and sell shares in many of its crown-jewel assets have sent the world’s global investment banks into a frenzy, prompting a rush of hiring and frantic attempts to woo the Kingdom’s ruling elite.
But, before the first deal has even come to market, many are beginning to worry whether they will even get paid for deals that could tie up highly-paid staff for many months and divert scarce resources from other, more profitable deals elsewhere.
Initial meetings with Saudi officials tasked with pushing through market reforms and privatisations outlined in the Kingdom’s ambitious “Vision 2030” programme have indicated that banks might not get paid, according to people familiar with the talks.
“They are reluctant to pay fees,” said the Middle East head of one US bank, who has spent the last few months pitching for Saudi business. “Their understanding of how we operate and how you pay for an investment banking service is not well established.”
The attitude should come as little surprise: Saudi Arabia has long been a desert for bank fees. Despite last year being a record for capital markets activity there, with US$57bn of deals, banks were paid just US$185m for their underwriting and advisory work.
That is slim pickings for an economy the size of Saudi Arabia. Banks earned more in Israel and New Zealand last year - economies that are half the size, with about half the volume of deals. Even sanction-hit Russia was twice as lucrative for banks when it came to such fees.
“Very few [Saudi] clients are willing to pay for real advice,” said a regional head at one European investment bank who has also been pitching for business.
BADLY PAID
Previous Saudi privatisations have been extremely badly paid. The largest so far, the US$6bn listing of National Commercial Bank in 2014, paid just US$6m in fees – and that had to be shared between dozens of underwriters, advisers and lawyers.
A fee of 0.1% is particularly low, even for a privatisation, which tends to pay poorly. The Polish government offered fees double that on its privatisation programme, while IPOs of private companies routinely earn fees as high as 6% in countries such as the US.
Still, banks have been lured by the Saudi privatisation programme. The prospect of over 100 state companies being sold has prompted many to divert resources to Riyadh. A third banker confirmed his firm had “increased the pace of investment” in the country.
But some are nervous about the fee issue, and are growing concerned that the intense focus on Saudi Arabia might hurt their performance elsewhere.
“The concern is that the draw on resources will weaken our performance somewhere else in the world where someone is willing to pay decent fees,” said the banker at the US firm. “The demand on resources has been so significant that it has sucked everyone out.”
BUILDING RELATIONSHIPS
Of course, some banks may be willing to offer their services for free – or next to nothing – in the short term, in the hope of building relationships with the Saudi government and corporates that could lead to more profitable business down the road.
As part of the country’s Vision 2030 programme, Riyadh plans to open up its wider capital markets arena, and encourage the development of debt, equity and loan markets that could be lucrative for the investment banking community.
“Historically, there have been minimum requirements for sophisticated advice, for external capital, for structured finance,” said the third banker. “That is changing, and clients are beginning to seek advice and services from investment banks.”
But plans are one thing – and practice another. Many companies are used to funding themselves with cut-price loans from domestic Saudi banks, and could prove reluctant to shift their borrowing to more expensive capital markets.
Bankers hope to persuade them that diversifying their funding sources will justify the additional expense. Some corporates found it difficult to borrow last year amid a liquidity crisis among Saudi banks, which saw deposits fall and interbank rates soar.
“If the privatisation processes are happening, if corporates are going to raise capital, normally it should translate into a substantial increase of fees,” said the European regional head. “But there have been many things announced many years ago that have not happened.”
MOMENTUM
With the oil price languishing below US$50, and the Saudi government facing its fourth year of fiscal deficit and burning through US$10bn of foreign currency reserves a month, momentum – at present – is behind market liberalisation.
But what might happen if the oil price snaps back and Saudi need for foreign capital is diminished is unknown. Banks are currently laying their chips on a Saudi fee fest, but that bet might yet come at a hefty price for some.
