Saudi Arabia is set to raise 3 billion euro out of orders in excess of 14.5 billion with its first bond issuance denominated in that currency, as the kingdom taps new financing sources to cover its budgetary needs in an era of lower oil prices.
The Saudis have sold nearly $60bn in international bonds since their debut as a global borrower in late 2016, making the kingdom one of the biggest debt issuers among emerging markets.
Its foray in the euro debt market – the first by a Gulf government – will allow it in the future to tap different investors at different times.
The Saudi bonds are split into a 1 billion euro eight-year tranche and a 2 billion euro 20-year tranche, a document issued by one of the banks leading the deal showed.
Demand for the debt offering was hefty, with orders exceeding 14.5 billion.
“Saudi Arabia will benefit from strong tailwinds as there’s good demand for euro-denominated paper driven by European investors looking for alternatives to very low yields in government bonds in Europe,” Marcelo Assalin, head of emerging market debt at NN Investment Partners, a Netherlands-based asset manager, said while the deal was being marketed.
Spreads on the eight-year bond tightened during the day to end up offering between 80 basis points (bps) over mid-swaps, while the 20-year notes offer between 140 bps over the same benchmark.
That meant the yield on offer in euro terms was significantly lower than interest rates offered by Saudi Arabia’s existing dollar debt of a similar maturity.
However, when compared to paper issued in euro by lower-rated countries like Croatia, Saudi Arabia was offering a slight premium.
“It comes a bit cheap to comparisons … It’s a debut euro issue and comes in the backdrop of Iran tensions, so that perhaps accounts for that,” said a portfolio manager.
Geopolitical tensions have increased in the Middle East since attacks on two oil tankers at the entrance to the Gulf.
The United States blamed Iran for the attacks. Tehran has denied any role in them.
Saudi Arabia’s budget deficit this year is expected to reach 7 per cent of gross domestic product, the International Monetary Fund predicted, above the government’s projection of 4.2 per cent of GDP.
The increase is mainly caused by higher government spending, which Riyadh needs to boost the economy and diversify it away from oil revenues, at the cost of heightening the kingdom’s fiscal vulnerabilities.
Goldman Sachs and Societe Generale coordinated the deal while BNP Paribas, Morgan Stanley and Samba Capital were mandated as lead managers and passive bookrunners.