- The world’s most profitable company, Saudi Aramco, smashed expectations to secure a debut bond issue with lower yields than the Saudi government, which owns the company. That implies, counterintuitively, that investors regard the company as being less risky than the government that owns it.
- Aramco’s offer drew more than $100 billion in orders on $12 billion of debt, with investor demand helping to lower yields on the deal, which was 10 times oversubscribed.
- While still pricier than the debt of other oil majors such as Chevron or Exxon Mobil, the deal indicates the willingness of major financial institutions to back the country’s future plans.
- Visit BusinessInsider.com for more stories.
The dust has settled on one of the biggest debut issuances in emerging-market history after Saudi Aramco priced $12 billion worth of bonds amid record demand for the oil and gas giant.
Investors piled in to the world’s most profitable company after it opened its accounts to the world for the first time ahead of the deal. The bonds were well received and exceeded initial expectations, with the yield coming in 20 basis points (a basis point is one-hundredth of a percent) lower than expected and lower even than Saudi Arabia’s own bond deal from January, according to someone familiar with the deal.
The reduced cost of the financing compared with Saudi Arabia’s sovereign debt is remarkable given that Aramco is wholly owned by the desert kingdom and is likely to remain so well into the future, regardless of the company’s initial-public-offering plans.
Aramco’s issuance consisted of:
- A three-year $1 billion bond maturing in 2022 that yields 2.375%, or 55 basis points above US Treasurys
- A five-year $2 billion bond maturing in 2024 that yields 2.125%, or 75 bps above US Treasurys
- A 10-year $3 billion bond maturing 2029 that yields 2.625%, or 105 bps over US Treasurys
- A 20-year $3 billion bond maturing 2039 that yields 3.375%, or 140 bps over US Treasurys
- A 30-year $3 billion bond maturing 2049 that also yields 3.375%, or 175 bps over US Treasurys
For context, Saudi Arabia issued $7.5 billion of sovereign bonds earlier this year despite overwhelmingly negative reactions to the assassination of the Saudi journalist Jamal Khashoggi. The US State Department recently issued travel bans to 16 people it deemed to be involved in the journalist's death.
One 30-year section of that debt yielded 210 basis points over similar-maturity US Treasurys - 35 basis points over the 30-year Aramco tranche.
Other major oil companies, such as Chevron and Exxon Mobil, have 30-year bonds with yields well below 3%, indicating the attraction of Aramco's debt to investors starved for yield in the current market.
The deal was run by major Wall Street firms including JPMorgan, Morgan Stanley, Citigroup, and Goldman Sachs alongside HSBC and NCB, and it indicates that financial institutions haven't cooled on the kingdom following the killing of Khashoggi last year.
"The deal appeals to multiple investor bases but it's unusual for a state-owned enterprise to have tighter yields than the sovereign," Anthony Simond, an emerging-markets investment manager at Aberdeen Standard Investments, told Business Insider. "Some investors may have shied away from the deal for ESG (Environmental, Social, Governance) reasons but for most these considerations are secondary."
It's part of a transparency push on behalf of Saudi Arabia as part of a will-they-won't-they over the company's plans for an initial public offering, which it shelved last year. The bond issuance reflects the company's reluctance to go public after being shunned by investors at a Saudi event dubbed "Davos in the desert" last year. It's thought that the company may well look to IPO in the next two to three years, according to Simond.
Saudi Aramco reported $111.1 billion in net income last year, according to Moody's, making it more profitable than Apple, Amazon, and Alphabet combined. The company accounted for approximately one in eight barrels of crude oil produced globally from 2016 to 2018, according to the prospectus.
