Aramco may tap a combination of funding options to finance Sabic deal, analysts say

Saudi state oil producer acquired the entirety of the Public Investment Fund's stake in the chemicals giant

The attack comes a day after two of Saudi Aramco's tankers off the coast of Fujairah suffered significant damage in a sabotage attack. Saudi Aramco
The attack comes a day after two of Saudi Aramco's tankers off the coast of Fujairah suffered significant damage in a sabotage attack. Saudi Aramco

Saudi Aramco’s acquisition of a 70 per cent stake in the Middle East's biggest petrochemicals producer, Saudi Basic Industry Corporation, will likely be financed through a combination of bonds and commercial loans from Saudi and international lenders, banking analysts said.

"Local banks will be very happy to lend," said Mazen Al Sudairi, head of research at Al Rajhi Capital in Riyadh. "It’s a new business but the amount mentioned is big so they would be looking abroad [as well]. So many banks would like to participate, whether local or international."

Aramco is expected to soon put in place a debt programme to fund the 259.125 billion Saudi riyals (Dh253.77bn) acquisition deal.

The Saudi state oil producer announced on Wednesday that it had signed a deal confirming its acquisition of the stake in Sabic. The transaction, which is subject to regulatory approvals, will provide a massive cash injection for the Public Investment Fund, the sovereign wealth fund at the centre of the kingdom's economic diversification plans. Sabic, as the petrochemicals giant is known, is the largest listed firm in the Middle East and will continue to see 30 per cent of its shares traded on the Saudi Tadawul.

The transfer of ownership of Sabic from the PIF to Aramco will be "connecting the Aramco downstream business with [its] upstream [operations]", Mr Al Sudairi added.

Last year, Saudi Aramco postponed its much-awaited initial public offering of 5 per cent of the firm, which is estimated to yield as much as $100bn (Dh367bn) in proceeds for Riyadh. The deal to acquire Sabic, which Saudi authorities have cited as the main reason for Aramco's public float, is likely to whet the appetites of the global banking industry, who are expected to flock to the kingdom in the anticipated bonanza of advisory fees as the country, the biggest Arab economy and Opec's top oil exporter, carries on with its privatisation drive.

The timeline for bond issuance will depend on when Aramco secures regulatory approval for the deal, said Chiradeep Ghosh, a banking analyst at Bahrain-based Sico Bank.

"I’m sure they are already sounding out financing transactions to local and international banks to gauge market response,” he said.

Issuances could be imminent. The Wall Street Journal, citing unnamed sources, suggested that a bond issuance could take place as early as next week.

The sheer scale of the the financing is huge and even if Aramco puts a sizable amount from its own kitty, it would still need to tap a mix of international and local funding options. It may find domestic resources restrictive due to the single obligor limit - the maximum amount a bank is allowed to lend to a single borrower - in the Saudi banking system, said Mr Ghosh.

"Just to put the numbers in perspective, if Aramco pays 100bn riyals out of its pocket it would still need about 160bn riyals in funding, which is almost 10 per cent of the Saudi Bank’s total lending book, and even if all of the Saudi banks max out their single obligor limit allowed by the regulator, it would not be enough," he said.

Bond issuance by national oil companies (NOCs) in the Middle East are a recent phenomenon. State-owned Abu Dhabi National Oil Company's pipeline subsidiary issued a $3bn bond in 2017, which was one of the region's largest non-sovereign debt deals.

Following the example of Adnoc and Aramco, other NOCs could also access foreign capital without taking the risks of listing shares to raise funds from equity capital markets, said Nasser Saidi of Nasser Saidi and Associates.

Aramco's earlier plans to list its shares on an international exchange, which included the options of an IPO in London or New York, were mulled with caution in part due to risks associated with US legislation that can penalise some state-linked entities, Mr Saidi said.

"In the event of listing in New York or London, it could be open to court cases and particularly in the US, so there is a danger there, you won’t have the same dangers for the bond issuance.”

Updated: March 28, 2019 05:42 PM


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