Middle East Bond: Public Investment Fund’s £650m dual-tranche bond
Saudi sterling
The Public Investment Fund turned to the sterling bond market in June, establishing itself as the only Saudi Arabian borrower in the UK currency and working with its lead banks to successfully position the credit and achieve cost-effective funding.
The decision to tap the sterling market was driven by PIF’s need to raise sterling to support its assets in the UK, which include football club Newcastle United and stakes in London's Heathrow airport and luxury department store owner Selfridges.
“We are not the sort of issuer that just does a different currency for the arbitrage,” said Ehsan Shehbaz, director in PIF’s global capital finance department. “The choice of sterling was because of specific asset deployment needs and acts as a natural hedge against FX risk.”
PIF priced a £300m 5.125% June 2029 tranche at 115bp over Gilts alongside a £350m 5.625% June 2039 bond at plus 125bp, with each note drawing orders of more than £1.9bn. That scale of demand was an impressive feat for a first-time issuer, especially given the tenors were relatively short for the sterling market, especially the June 2029s.
“The sterling market is known for its insurance investor base and long-end investments,” said Faisal Alageel, an associate at PIF. “The duration of the specific asset [we were funding] is around 10 years so that put some pressure on this transaction.”
The choice of tenors was not the only difficulty.
When it came to pricing, positioning a credit such as PIF in a market with no outstanding bonds from Saudi Arabian issuers, limited issuance from the Middle East in general and no other clear comparables to help guide pricing, presented further challenges.
In the search for comps, the net was cast wide and included the only other sovereign wealth fund to have issued sterling bonds, Singapore’s Temasek Holdings, as well as Crown Dependency the Isle of Man, charitable foundation Wellcome Trust and high-quality corporates such as Nestle.
Although PIF has a need for the currency and was therefore not swapping the proceeds, the final landing points also implied only a very minimal pickup to where it would have issued in US dollars.
Investor diversification was another key objective. While there was some emerging market investor interest, allocations were skewed heavily towards UK sterling credit funds. Some sterling rates investors also participated in the transaction.
Barclays, BNP Paribas, HSBC and JP Morgan were global coordinators, and active bookrunners alongside Bank of America, Citigroup and Deutsche Bank.
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