Complex Made Simple

Saudi’s ACWA expected to offer sizeable spread on $1bn project-linked bond

* ACWA, First Saudi corporate to issue after jumbo sovereign bond

* Targets US, Asian investors keen on long-term Saudi risk

* Price will reflect complex bond structure, long tenor

* Some fund managers suggest around 330 bps over mid-swaps

* 30-year Saudi notes, Abu Dhabi’s Ruwais bond are comparables

Saudi Arabia’s ACWA Power is expected to offer a hefty spread on its planned $1 billion bond offer, partly because of market volatility since the US elections and a narrowing issuance window, bankers and investors said.

ACWA, in which Saudi sovereign entities hold a combined 16.3 per cent stake, is set to be the first international bond from the kingdom since the government’s mammoth $17.5 billion debt sale in October, Riyadh’s first issue.

Demand for Saudi debt

The huge success of the sovereign issue showed there is strong demand for Saudi debt, especially from Asian and US investors. But market volatility, and the complexity and long maturity of ACWA’s proposed bond structure, mean it may not issue cheaply.

The company, which operates and has interests in power generation and desalinated water production plants, will on Thursday end a series of investor meetings across Asia, Europe, the Middle East and the United States.

The bond offer, comprising senior secured fixed-rate conventional notes and trust certificates, would have a total size of about $1 billion, according to a document issued by the firm to investors and seen by Reuters. The amortising bond would mature in 2039, with the principal repaid over 13.5 years.

For many investors, the timing of the issue is not ideal. “Given that they’re issuing at the end of the year, when people have almost closed their books, they’ll have to offer a high margin to get people’s interest. Everyone made money this year; nobody wants to risk losing money now,” said a local investor.

US interest rate hike

A possible US interest rate hike in December is another risk. So ACWA will have to count on opportunistic investors; in particular, it is likely to tap into the long-term liquidity pool offered by the US and Asian investors who bought heavily into the 30-year tranche of the Saudi sovereign issue.

A portfolio manager said the ACWA deal could be launched at a premium of between 100 and 120 basis points over the sovereign’s 30-year notes, which are currently trading at around 230 bps over mid-swaps.

Some investors are also comparing the ACWA bond to the $825 million, 2036 project bond issued in 2013 by the UAE’s Ruwais Power Co (Shuweihat 2), an affiliate of state-owned Abu Dhabi National Energy Co.

The Ruwais paper is not very liquid; it is now trading at around 230 bps over mid-swaps but would be at around 280 bps if liquidity was better, two fund managers said.

Adding a new issuer premium for ACWA, and accounting for the added credit risk of Saudi Arabia – which has a lower rating than Abu Dhabi – the ACWA bond might reasonably price around 330 bps over mid-swaps, they said.

Investment grade

The bond would mostly be repaid with cash flows from nine projects in Saudi Arabia. The document says ACWA believes the bonds would obtain investment grade ratings from two major agencies.

The sale is being coordinated by Jefferies, with Citi, CCB Singapore, Mizuho and Standard Chartered as joint lead managers. No United Arab Emirates or Saudi bank has been appointed lead manager because the long maturity means local investor appetite will be limited, said a local banker away from the deal.