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28 April 2019

GCC: A pricing marvel

When Aramco teaches the fixed income world how to make the impossible possible by pricing its bonds inside the sovereign curve, writes Mohammed Khnifer, debt capital markets banker at a supranational banking institution


The $100 billion-plus of orders that Aramco’s generated for its maiden $12 billion bond sale will be also remembered as the issuance that was marketed by Wall Street celebrities and bankers. It is indeed the “one-of-a-kind emerging markets deal”.

Wider positive effect to GCC Capital Market

Almost all the Saudi (sovereign) yields have registered their lowest in more than a year. It means that the cost of borrowing for sovereigns and corporates will be much lower than before. Aramco has brought the sovereigns yields down with it. This ripple effect of Aramco bonds has been seen in the repricing of the Saudi yield curve and naturally this will tighten the yield curve of Abu Dhabi and Kuwait as well.

When investors are turn apart

There was new liquidity that we rarely see coming to Saudi Arabia. These were the investors who focused on investment grade, and those who invest in corporate bonds. These two types of investors changed the level of pricing they turned the table against the traditional investors—emerging market investors of whom some of them threatened not to subscribe after seeing the initial price thoughts. Emerging market investors had so many reservations on Aramco pricing. This new liquidity changed everything.

Trading through sovereign

The conventional wisdom in our fixed income industry that it is rare for debut bonds of a state-owned company to yield less than the sovereign debt. It’s unlikely that Aramco’s bonds will trade tighter than Saudi Arabia’s, noted Bloomberg Intelligence in an insight before the issuance was closed.

However, I have iterated that Aramco will try to price inside the yield curve. In 2015, Aramco (A+ but unrated at that time) managed to obtain two dollar tranches that were priced at 12 basis points (bps) above Libor. That is lower than the 15 bps above Libor that Exxon Mobil (AAA) paid for its $5 billion revolving credit facility signed in 2013. Having priced inside the sovereign curve by 10 to almost 25 bps, we can say now that Aramco made the impossible possible.

Allocation strategy

The leads allocation to Europe and US will get you the volume but the cost may increase and you will influence the sovereign’s spreads. Weighing heavily on Asia makes sense for two reasons:

  1. Aramco as a brand is well-known— of the oil sold elsewhere, 71 per cent went to customers in Asian markets;
  2. Historically, the allocation (for Asia) into previous sovereign issuance was less than 18 per cent compared to 75 per cent to US and Europe.




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