Saudi firms raise debt sales

Dubai:  Companies in Saudi Arabia, the largest Arab economy, are stepping up bond sales, leading to the best start in at least eight years, as curbs to bank credit push down debt costs.

Corporate debt sales from the kingdom totalled $3.23 billion (Dh11.87 billion) so far this year, compared with $200 million in the same period last year, led by Saudi Electricity, the Arab world's largest utility, and Banque Saudi Fransi, according to data compiled by Bloomberg. Saudi Electricity this month paid 65 basis points less over the three-month Saudi riyal interbank offered rate compared with last year.

"There will be good demand for Saudi debt if it's issued by companies with solid business models and good governance," said Mohi Al Deen Kronfol, a managing director at fund manager Algebra Capital in Dubai.

Rules tightened

Banks tightened rules for lending after Sa'ad Group, the business owned by Saudi billionaire Ma'an Al Sanea, and Ahmad Hamad Algosaibi & Brothers Co defaulted on loans last year after borrowing at least $15.7 billion from about 80 banks. Saudi Arabian Oil Co, the world's biggest state-owned oil company, and Total's joint-venture plans to sell about $1 billion of Islamic bonds this year to help fund the construction of a $12 billion refinery project.

Saudi Electricity sold 7 billion riyals (Dh6.84 billion) of 20-year floating-rate Islamic bonds to yield 95 basis points, or 0.95 percentage point, more than the three-month Sibor. That compares with a spread of 160 basis points the company paid on the sale of 7 billion riyals of similar-maturity bonds in June.

Sabic Capital, a unit of Saudi Basic Industries Corp., hired HSBC, JPMorgan Chase & Co and Royal Bank of Scotland Group to sell a "benchmark-sized" bond, Chief Financial Officer Mutlaq Al Morished said on Monday. Sabic will start investor meetings on May 20 and the offering is subject to market conditions, Al Morished said. A benchmark offering is typically at least $500 million.

The bond market is "very attractive right now from a rates viewpoint and from a volume viewpoint", said Rajiv Shukla, managing director and head of global capital finance at HSBC Saudi Arabia in Riyadh. "You got banks which are not lending enough. What you will find is that high-quality bond issuance will find great takers from the bank treasuries. This is driving down the spreads."

Bank lending to businesses in Saudi Arabia was flat last year after average annual growth of 27 per cent between 2004 and 2008, according to Jadwa Investment in Riyadh. Private companies comprise almost half of the economy in the country.

Dubai World, one of Dubai's three main state-owned holding companies, is negotiating with lenders to restructure $24.8 billion of debt after roiling global markets by proposing a freeze on loan payments in November. European nations last week agreed to a $1 trillion bailout to contain a sovereign-debt crisis in the region.

Extra yield

"The European debt crisis is feeding uncertainty into the debt markets," said Riyadh-based Jarmo Kotilaine, chief economist at NCB Capital. "There is a lot of appetite for Saudi issuers, but the question is whether borrowers will go and tap the market in this environment when there is so much up in the air."

The extra yield investors demand to own emerging-market debt over US Treasuries widened 37 basis points on May 6 to 3.32 percentage points, the most since October 28, according to JPMorgan Chase & Co's EMBI+ Index. The spread narrowed to 2.93 percentage points yesterday.

Saudi Arabia is rated Aa3 by Moody's Investors Service and AA- by Standard & Poor's, the fourth-best investment grade rankings.

Saudi bank "liquidity is only growing, and not decreasing", helping fuel demand for local bonds, HSBC's Shukla said.0