Saudi Arabia issued one of its largest ever benchmark trades on Monday, raising US$12bn in what is slated to be its only outing in international markets this year.
The size of the three-tranche transaction reflected the significant orders which lead managers Citigroup, HSBC, JP Morgan and Standard Chartered received for the six, 10 and 30-year tranches.
The combined book topped US$33bn, allowing the Middle East sovereign to price US$3.25bn 4.75% January 2030s, US$4bn 5% January 2034s and US$4.75bn 5.75% January 2054s at spreads to Treasuries of 90bp, 110bp and 170bp. Pricing started at the IPTs of 115bp, 135bp and 195bp areas.
“When you are seeing such demand, and at those levels, it makes a great deal of sense to derisk your funding,” said a banker involved in the transaction. The deal marked the largest international syndication from the sovereign since 2017, according to IFR data.
Given the precedent set by previous years, expectations were that Saudi Arabia would issue in size – in January 2023 it issued US$10bn – however, investors also knew that it would likely be the only time this year that the sovereign taps the market, and the limited opportunities to access new paper helped underpin demand.
“There was clear signalling from the issuer that this was the one chance to buy Saudi in the primary market this year, which was supporting demand, plus there is the transition story around the credit and Vision 2030, which people are buying into,” said the banker close to the deal.
Despite the quality of the kingdom’s credit – the sovereign carries A1/A+ ratings from Moody’s and Fitch and an unsolicited rating of A from S&P – and its push towards economic diversification, some investors still see Saudi credit spreads too tight for the potential risks; in particular, the country’s reliance on oil revenues.
“I would argue that a bit more widening would be necessary to bring some value in the face of uncertainty about the demand for oil and the fact that the Saudis have cut production and are signing new contracts at reduced prices,” said Demetris Efstathiou, chief investment officer of Blue Diagonal Capital.
Saudi Arabia’s curve moved out during the day, impacting fair value calculations for the deal. Syndicate bankers on and away from the deal put new issue premiums at around 10bp–15bp for each tranche. “It’s not a market where people can come in and pay no new issue premium,” said a banker not involved in the deal.
The deal also demonstrated the renewed appetite for duration among fixed-income investors. There was a clear skew in demand towards the longer bonds. Orders for the six-year exceeded US$9bn, but demand for the 10-year topped US$12.5bn and interest in the 30-year went north of US$11.5bn. For investors with a view that rate cuts are ahead, locking in current yields for as long as possible is attractive.
For issuers, the rally in risk assets and compression in spreads during late 2023, even following the softening in credit seen during the first week of this year, makes printing longer-dated bonds increasingly attractive.
“Yields are not what they were when they were at silly levels and people were issuing 30-year bonds with three handles, but we are getting back to sub 6%,” said a second banker away from the Saudi Arabia deal. “I think for someone like Saudi 6% is something of a mental threshold.”
Saudi Arabia’s three tranches priced at respective yields of 4.887%, 5.13% and 5.908%.