* Saudis under pressure to produce huge issue
* But may raise much less to set cheap benchmark
* Investors may demand premium beyond rating gap
* Spreads of 25-60 bps over Qatar possible
* 30-year tranche could offer big incentive
By Davide Barbuscia
DUBAI, Oct 17 Potential investors in the Saudi
Arabian government's first international bond issue are
preoccupied by a key question: how will the Saudis resolve their
dilemma between size and pricing?
Any issuer must choose between raising as much money as it
can and selling debt as cheaply as possible. But as Saudi Arabia
holds investor roadshows in the United States this week, the
choice looks particularly acute.
With a 2016 state budget that envisages an $87 billion
deficit, and tightening bank liquidity at home making it
increasingly difficult to sell large amounts of debt
domestically, Riyadh is under pressure to maximise the size of
its international issue.
That has some bankers predicting an issue of as much as $15
billion or more - conceivably surpassing Argentina's $16.5
billion issue in April, the biggest emerging market sovereign
sale to date.
"They'll come to market and they will come in a big way,"
said Hani Ibrahim, head of debt capital markets at Qatari
investment bank QInvest. "They need to fill a big funding gap
and there's a limit to how much they can raise domestically.
"Also, Qatar is a small country. How can Qatar issue $9
billion and Saudi less than that?" he added, referring to a debt
sale by Doha in May.
But Riyadh's decision is complicated because its debut issue
will set a benchmark for future sales - not only by the central
government, but by a string of Saudi companies that intend to
raise money overseas.
That may persuade the Saudis to forego billions of dollars
of size in order to keep down the yield on the issue, which will
have five-, 10- and 30-year tranches.
"With low oil prices, budget deficits are here to stay for a
few years, and Saudi Arabia will need to approach international
capital markets on a frequent basis," said Anita Yadav, head of
fixed income research at Emirates NBD in Dubai.
"Given the importance of setting a benchmark not only for
its own future issues but also for potential bond offerings from
government-owned entities, I think Saudi Arabia's government
will be very vigilant about pricing. It is likely that the
government will compromise on size over pricing at this stage."
Although Saudi officials did not make specific pricing
proposals at roadshows in London last week, bankers involved in
the transaction said the kingdom wanted to market itself as a
G20 country rather than an emerging market - and was therefore
aiming for tight pricing.
But many investors see Qatar's bond as a comparison for the
Saudi issue, and regardless of size, the Saudis are widely
expected to pay more. Qatar issued $3.5 billion of five-year
bonds in May at 120 basis points over U.S. Treasuries, $3.5
billion of 10-year at 150 bps and $2 billion of 30-year at 210
Qatar, rated Aa2 by Moody's and AA by both Standard & Poor's
and Fitch, is between one and four notches above Saudi Arabia.
In addition, some investors may demand a small premium for
political risk, which they think isn't fully captured by the
"There's the difference in credit rating, but also U.S.
investors have a different view on the Saudis. They'll consider
the Saudis' engagement in Yemen, the much bigger budget deficit,
some political uncertainty," Yadav said. "I think even if the
Saudis printed only $1 billion, they would still have to pay
more than Qatar."
Last month's U.S. Congress vote to let relatives of victims
of the Sept. 11 attacks sue Riyadh may also have a small effect.
"Of course the bill will have an impact - look at the Saudi
stock market's movement after the bill was passed. And it will
affect the size that they will be able to issue as well," said a
Dubai-based debt trader.
Ultimately, one potential investor predicted , spreads for
the three tranches of the Saudi bond will price between 30 and
60 bps above Qatar. Another forecast a 25 bps premium for the
five-year tranche and 50 bps for the 30-year.
"The 30-year tranche is the more interesting in terms of
yields, and I believe they will offer incentives to invest in
the longest piece of debt," said Angelo James Rossetto,
investment manager at GMSA Investments, a London-based asset
"Qatar's 30-year tranche was offered at 210 bps over U.S.
Treasuries and is now trading in the 180 bps region. I believe
the Saudis will be aggressive at the beginning and they'll try
to price the bond at around 200 bps."
(Additional reporting by Hadeel Al Sayegh; Editing by Andrew
Torchia, Larry King)