Saudi Arabia to sell record $17.5 billion of sovereign bonds

Saudi Arabia plans to raise $17.5 billion in the biggest ever bond sale from an emerging market nation, according to four people with knowledge of the offering, as it seeks to shore up finances battered by the slide in oil.

The government aims to sell dollar-denominated bonds due in five years yielding 135 basis points more than similar-maturity U.S. Treasuries, 10-year notes at a spread of 165 basis points and 30-year securities at 210 basis points, the people said, asking not to be identified because the information is private. The kingdom plans to raise $5.5 billion in each of the five- and 10-year bonds and $6.5 billion in 30-year debt, after receiving $67 billion in bids, the people said.

The sale will eclipse Argentina's $16.5 billion offering in April as the largest from a developing nation, underlining the deepening strain on a country that has eschewed international debt markets until now. The country registered a budget shortfall of $97 billion last year, equal to 15% of its gross domestic product, prompting the government this year to cut subsidies, wages and spending.

“Boom, they went full-scale,” said Angelo Rossetto, a trader at GMSA Investments in London who is bidding for the bonds. They “probably want to take advantage of the window before elections and a possible rate increase. Print a lot now and then see what unfolds,” he said.

The offering followed a week of presentations to prospective buyers, taking in London, Los Angeles, Boston and New York, at which officials emphasized the kingdom's efforts to diversify the $650 billion economy away from oil. Attendees such as Gregory Saichin, the chief investment officer for emerging market bonds at Allianz Global Investors in London, were concerned the Saudi delegation avoided discussing crude prices.

The proposed pricing offers a premium to similar maturity bonds from neighboring Qatar. The country's five-year bonds were trading at a spread of 98 basis points over U.S. Treasuries, 121 basis points on 10-year bonds and 164 basis points on 30-year securities as of 5:25 p.m. in Dubai, according to data compiled by Bloomberg.

Saudi Arabia is rated A1 at Moody's Investors Service, the fifth-highest investment grade and two-notches below Qatar. Still, the premium isn't high enough for some investors.

“I imagine they have enough sovereign wealth fund and cross-over investors sewn up to justify the expensive pricing,” Edwin Gutierrez, the head of emerging market sovereign debt at Aberdeen Asset Management in London, which oversees more than $400 billion, said before the final price guidance Wednesday. “I can find cheaper bonds elsewhere.”

The sale marks the latest step in Saudi Arabia's efforts to open up its economy, largely driven by Deputy Crown Prince Mohammed bin Salman. Among proposals are an initial public offering of Saudi Aramco, the state-run oil giant, and further measures to make the $350 billion Tadawul Stock Exchange more accessible to foreign investors.