Saudi sovereign fund PIF to cut banks’ returns with new $10bn loan

Saudi Arabia’s Public Investment Fund (PIF) is putting together a $10bn loan and plans to more than halve the returns it gave banks last year in its first multibillion dollar facility, two banking sources familiar with the matter said.

PIF raised $11bn through a five-year loan last year and is in advanced talks to borrow $10bn more. It plans to offer lenders an initial interest rate of around 30 basis points over the London Interbank Offered Rate (Libor) for the one-year loan, said the sources about the private talks.

The fund had offered banks 75 basis points over Libor last year with its $11bn facility, sources said at the time.

A PIF spokesman declined to comment on the new loan plans and on the pricing being discussed.

While the shorter duration of the new transaction justifies a smaller interest rate request, its large size and the fact that it comes less than a year after PIF’s first jumbo loan are straining the lending capabilities of some banks, said the sources.

“Banks are full,” one of them said, referring to banks’ exposure to Saudi risk.

The fund, which has about $300bn in assets, is the main vehicle for Crown Prince Mohammed bin Salman’s plan to diversify the economy away from oil.

The new “bridge” loan will be repaid once PIF receives next year half of the $69bn in proceeds from the sale of its stake in petrochemical producer Saudi Basic Industries Corp (SABIC) to oil giant Saudi Aramco.

The interest margin would increase during the duration of the loan, depending on how long PIF takes to repay it, the sources said.

The Saudi government and state entities like PIF and Aramco have raised over $100bn in international debt since 2016 through bonds and loans.

Banks have flocked to these transactions to strengthen their relationships with the kingdom ahead of an expected flurry of more lucrative deals, as Saudi Arabia reforms its economy amid lower oil prices.

But sources told Reuters in May that PIF’s new borrowing request was attracting tepid interest among some lenders, indicating Saudi Arabia may have to start paying higher rates for sovereign debt that is not a precursor to more profitable work for banks.

PIF has not sent out yet an official request for proposal for the new facility, but is gathering commitments from banks and is expected to formalise the deal shortly, said the sources.

Its $11bn loan last year saw the participation of 15 banks comprising JPMorgan, Citi, HSBC, BNP Paribas, Standard Chartered, Bank of China, Industrial and Commercial Bank of China, Goldman Sachs, Morgan Stanley, SMBC, Mizuho, MUFG, Credit Agricole, Societe Generale and Bank of America Merrill Lynch.