Saudi deals dry up amid uncertainty

IFR 2211 25 November to 1 December 2017
6 min read
EMEA, Emerging Markets, Asia
Gareth Gore

When Saudi Arabia unveiled a grand plan early last year to overhaul its economy, create millions of jobs and facilitate trillions of dollars of fresh investments, the landmark announcement created a frenzy among the world’s investment banks.

Scenting huge deals – and fees – many lavished the kingdom with attention, flying in senior executives, increasing headcount in Riyadh and upping financial resources committed to the country as they geared up for big business to come.

But, rather than spur a big uptick in deals, Vision 2030 – as the bold plan is known – so far seems to have had the opposite effect. Bond issuance, IPOs, equity sales and loan syndications have all ground to a halt in the two years since the plan was unveiled.

While the government has grabbed headlines with two large bonds this year – a US$9bn sukuk issue in April and a US$12.5bn conventional deal in September – activity at the corporate level, where banks earn most of their money, has been disappointing.

Fees from underwriting and advisory are set to be the lowest in six years. It’s been a poor year all round: equity volumes are a quarter of the post-financial crisis average, loan volumes have collapsed, and just two corporate bond deals have printed.

“Twelve months ago, if you’d asked me, I was expecting Saudi corporates to be heavy issuers this year, but it just hasn’t happened,” said the regional head of capital markets at one US bank. “The market has been dead.”

CONSULTANT ARMY

Uncertainty around Vision 2030, which is still being fleshed out by Saudi officials and an army of management consultants, has left many companies unwilling to make any large financial decisions until there is more clarity.

At the same time, a slump in the Saudi economy has reduced their need for funds, with many corporates paring back - rather than expanding - their investment programmes. Economic activity in the kingdom has contracted for the past two quarters.

“Lots of corporates are re-examining their day-to-day business and funding needs,” said one senior banker who works for a European bank in Riyadh. “Some projects have been shelved or decreased: all the focus now is on getting costs down.”

But while uncertainty and economic contraction have had an impact, many bankers feel that the resources being lavished on the kingdom by perhaps overly eager investment banks might actually be backfiring, making deals – and fees – less likely.

Almost all the global banks have substantially increased direct lending to corporates and state-owned entities in the country – often at below market rates – as they seek to solidify relationships and bat off rival banks ahead of the supposed fee goldrush.

To make matters worse, with the economy stuttering and private demand for borrowing down, local banks have diverted lending to the government and SOEs. Saudi banks have increased lending to the sector by 26% over the past year.

“They haven’t needed to tap capital markets because they have a lot of liquidity,” said the regional head of a second European bank. “All the banks are suffering from a lack of activity and it is painful – although some are able to take that pain more than others.”

JUST TWO DEALS

Just two corporates have printed international bond deals this year – Dar Al-Arkan Real Estate for US$500m in April and Acwa Power for US$814m a month later. Equity issuance has been just over US$400m, half the previous year and a quarter of the post-crisis average.

By contrast, banks have extended a number of big loans to corporates – including a US$1.75bn facility for Saudi Electricity Company and US$1.2bn for Saudi Kayan Petrochemical. Many other loans have been extended but not publicly disclosed.

The terms of most of the loans are undisclosed, but bankers say that many facilities have been extended on extremely accommodative terms in the hope of winning future business. With little business on the horizon, many local teams are facing questions.

Saudi Arabia Equity issuance

“We recognise we need to deploy balance sheet to win future business in the country,” said the banker at a US firm. “Saudi is the single biggest area of growth for us in terms of balance sheet - a lot of promises have been made internally.”

“A lot of these loans on a pricing basis don’t make sense,” said a second banker at a US bank. “But when you factor in the chances of IPO fees and other business, it changes things. You have to look at things holistically.”

While some banks have been able to supplement their paltry investment banking fees with ancillary business in the kingdom, others haven’t and are making losses. How long they can maintain those losses is an open question.

HOPE SPRINGS ETERNAL

Many bankers hope that things might pick up next year. But previous optimism has proven wrong. At the same time, visibility around Vision 2030 may still be some time off – and recent political upheavals in the guise of a corruption clampdown may have muddied the waters further.

At the same time, local financing conditions remain abundant – local banks and local bond markets, which have much lower disclosure standards than international markets, are a very attractive alternative for corporates seeking funding.

“Next year should start to pick up but it will only be a trickle,” said a banker at an Asian bank. “But we are up against a local market that is cheaper, requires less disclosure, and where you won’t face any difficult questions.”

“That said, it is difficult for any bank to ignore – Saudi could become very lucrative and nobody wants to miss out on that.”

Saudi Arabian flag
Saudi Arabia Equity issuance