The Daily Update - Go Go Aramco (Part One)

Saudi Aramco is tapping the debt market, and demand across the six tranches has rocketed to ten times the planned $10bn issuance. The debut of this Saudi government owned behemoth comes as Brent crude holds around 5-month highs of $71 a barrel and in the wake of long-awaited transparency into the company’s workings and profitability. The 470-page prospectus and accompanying reports show last year’s profits of $111bn which is more than Exxon, Chevron, Shell, Total and BP… combined; and with a market cap in the region of $1-2tn, even if the company doubled their debut issuance it would still be just a drop in the Ghawar Oil Field.

Saudi Arabia’s debut sovereign bond issuance in October 2016 followed a similar narrative with the planned $10bn ultimately increased to $17.5bn following pent-up demand – and setting the record for largest ever emerging market bond sale. With over $100 billion on the order books, Aramco’s debut may end up even larger than this and potentially pricing inside the sovereign; currently KSA 10-year bonds trade at a spread of around 115 basis points. Expectation is for Aramco bonds across the curve to trade within a few basis points either side of the sovereign. It’s rare for government-owned companies to trade tighter than their parent sovereign but is far from unprecedented. Indeed, there is potential for this here: if some investors eager to hold high quality (A1 paper with above-market yields) cannot hold the sovereign, or if some see a marginal advantage in the seizable assets of Aramco over bonds issued directly by the Kingdom. Moreover, Moody’s were even explicit to say it has “many characteristics of a Aaa-rated corporate” which is a great summary of the ever more apparent financial health of the company.

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