We commented yesterday ahead of the maiden issuance of Saudi Aramco debt which ended up coming to market at lower spreads than the sovereign: the 10-year tranche came in at just 105 basis points above US Treasuries (versus 117 basis points for Saudi government bonds) and total issuance across five tranches increased to $12bn, above the originally planned $10bn. The markets were clearly attracted to such yields from a highly rated and highly profitable entity versus the broader universe. Our value monitors put the issuance at 1.3 notches cheap versus a typical A1 rated bond, but still around a half-notch premium versus the sovereign to be a part of this historical debut.
Of course, investors still need to price in the geopolitical and political risks, including how the government might siphon future profitability to maintain a happy citizenship and continue working towards their wishful “Vision 2030” goals: which although unattainable are an ambitious step in the right direction. Whilst this continues markets should continue to see value in Saudi Arabia with any change in trend likely to provide plenty of early indicators of deteriorating credit metrics. Indeed, Venezuela’s “Hunger Bonds” are a painful reminder of how terrible things can get and yet for many years the country still saw merit in meeting its obligations in order to keep the door open to intrepid investors: hopeful that a future government will one day effectively marshal resources and repay their odious debts. But notwithstanding both their huge natural resource reserves, Venezuela and Saudi are worlds apart. In recent times, Venezuela was only ever able to make interest payments on debt by further borrowing and neglecting fundamental domestic needs – until defaulting again in late 2017. It has since been a futile battle for bondholders and a humanitarian crisis for the people of Venezuela. In economic contrast, Saudi has long been efficiently profiting from its stockpile (although Ghawar output was 3.8 million barrels a day less than expected) and is a 7-star net foreign creditor with clear investment plans for the future.
We highlighted one example of this a couple of months ago regarding Aramco’s further ambitions to develop their natural gas business, with partnerships in the works from the US to Russia to Australia. This may be one path these funds may be piped to, but the overarching reason for such wealthy and profitable entities issuing debt is almost always diversification. “Why?” is a common question concerning creditor nations borrowing money; but it is precisely because they have so much stockpiled resources that makes it important to diversify now by monetising future cash flows. Unlike debtor countries – that borrow primarily to finance consumption – as Saudi (including via Aramco and other quasi-sovereigns) continues to borrow: it may actually improve the economic health and financial stability of the country as it minimises its vulnerability to volatile oil prices via strategic diversified investment. With determined plans and capability to repay obligations the A1 rated quasi-sovereign with “characteristics of a AAA-rated corporate” clearly offers value, and the massive oversubscription by markets is testament to that.