Complex Made Simple

Why Saudi’s wealth fund is raising $billions in commercial debt

Saudi’s Public Investment Fund (PIF) is borrowing from banks, adding to a current strategy of issuing bonds, to raise funds.

There are two main reasons for that, both with a set of merits.

$11bn in bank loans

Saudi Arabia’s sovereign wealth has raised an $11 billion loan from a total of 15 banks, the Maaal financial news website reported on Tuesday, citing unnamed sources, according to Reuters.

A source with direct knowledge of the matter told Reuters last month that the Public Investment Fund (PIF) will pay a margin of 75 basis points over the London Interbank Offered Rate (LIBOR) on the loan, but the PIF has yet to announce the deal or name the participating banks.

Saudi Arabia’s sovereign wealth fund will sign an $11 bn loan this week, marking its first-ever borrowing, according to people familiar with the matter, reported Bloomberg

Some of the biggest global lenders including Goldman Sachs Group Inc, HSBC Holdings Plc and JPMorgan Chase & Co are providing the loan, said Bloomberg said the people.

London-based boutique Verus Partners is advising the Public Investment Fund on the talks, the people said.

Read: Saudi boldly jumps into a future bright for business

Why the loan?

Reason 1: The deal will give the PIF additional cash after two years of major new investments.

The PIF is willing to borrow to diversify the kingdom’s oil-dependent economy and boost returns from investments, the fund’s managing director Yasir Al-Rumayyan said last year.

PIF is also in talks with Aramco to sell its stake in chemical producer Saudi Basic Industries Corp (SABIC), which could raise as much as US$70 bn.

The PIF plans to become the world’s biggest sovereign fund, controlling more than $2 trillion by 2030.

The PIF deal is the first commercial loan for the PIF, which has been tasked with helping to deliver the government’s Vision 2030 reforms, announced in 2016, aiming to free the kingdom from its dependence on oil exports.

“The debt is priced the same as a $16 bn loan arranged by the Saudi government in March from a similar group of banks,” said Bloomberg.

The deal comprised an $8.35bn term loan and a $7.65bn Murabaha financing.

Read: Saudi commercial bank assets grew 2.2% in 2017: 2018 promising

Reason 2: The PIF started approaching banks in July, people familiar with the matter said at the time.

“The fund planned to establish a group of banks with which it would work on future deals,” they said, reported Bloomberg.

Morgan Stanley, Citigroup Inc, Standard Chartered Plc, BNP Paribas SA, Societe Generale SA, Mizuho Bank Ltd, MUFG, Credit Agricole SA, SMBC, Bank of America, Bank of China Ltd and Industrial & Commercial Bank of China Ltd also participated in the loan, the people said.

The fund hired former Bank of America Merrill Lynch managing director Alireza Zaimi as head of corporate finance and treasury last year to work on its borrowing plans.

“It’s the first deal for the sovereign wealth fund and it cements our relationship with the kingdom,” bankers told Reuters.

“PIF received commitments of up to $20bn from banks eager to lend to net lucrative ancillary business and finally settled on the $11bn figure after scaling back banks’ commitments,” the bankers added.

PIF was originally looking for a US$6bn-$8bn loan, Reuters reported in July.

Read: Saudi Aramco has a trick up its sleeve to cash in without an IPO

More Sukuk bonds

Al Arabiya media reported that the Saudi Ministry of Finance, through the Office of Public Debt Management, has announced that it has completed receiving investors’ requests for its second international issuance under the Saudi Government Sukuk Program in US Dollars as part of the Ministry of Finance’s strategy to develop Shariah-compliant capital markets.

The volume of the issue was set at a total amount of $2 billion for Sukuk maturing in January 2029. The issue is expected to be settled on September 19, 2018, or at a date close to it.

Over the past two years, Saudi Arabia raised $50 billion through international conventional and Islamic bonds.

Read IMF on Saudi- Pleased with reforms but caution on spending advised

Trust in Saudi MSCI

CNBC reported that Saudi’s financial sector got a boost late this spring when MSCI announced in June that it would include Saudi Arabia in its emerging markets index, which means billions in institutional investors’ capital will flow into the stock market, already the region’s largest.

The change came after Saudi regulators enabled foreign investors to own up to 49 percent of listed securities.

“The iShares MSCI Saudi Arabia ETF (KSA) is the No. 1 performer among all single-country funds in 2018. Even as the recent slide in crude oil has lowered its year-to-date return from over 20% to 12%, it remains the top-performing stock market in the world, and one of only about a dozen that are generating positive performance this year,” said CNBC.