By Tom Arnold, Karin Strohecker and Jennifer Ablan
LONDON/NEW YORK/DUBAI, April 4 (Reuters) - For Saudi Aramcoand its advisers, a debut international debt issue that couldraise well over $10 billion presents a key challenge - how toforge an identity as a state-owned major while in the sameleague as the likes of Exxon Mobil and Shell.
At stake is the likely multi-million dollar difference ininterest payments over coming years between its standing as anindependent international corporate and one tied closely to thehost kingdom whose oil it ships to global markets.
Having said in January it was planning its first everinternational debt issue, Aramco has been meeting with investorsin Asia, Europe and the United States to promote the bonds. Ithasn't commented on what was said during the sessions.
Moody’s and Fitch said Aramco’s rating was capped by theirassessments of Saudi Arabia, but unconstrained by its sovereignlinks it would have achieved ratings that would put it at parwith the likes of Exxon, the world’s largest listed oil company.
But bankers arranging the roadshow have tried to convincecrossover buyers, both emerging markets funds and pureinvestment-grade players, about Aramco’s merits, marketing thecompany as having characteristics which put it above the creditworthiness of Saudi Arabia.
“We would look at it its rating against the sovereign, butthere’s a lot of interest from outside the emerging marketsuniverse from investors looking at it against international oilmajors from the U.S. and Europe,” said Jan Dehn, head ofresearch at Ashmore Group.
Previously reluctant to do so, the oil major was forced todisclose its financials to obtain public credit ratings ahead ofthe debt sale.
SOVEREIGN DILEMMA
Aramco’s financial data, published earlier this week, showedit generates by far the biggest profit of any company in theworld, boasting core earnings of $224 billion and a net incomeof $111 billion.
These figures have practically guaranteed plentiful ofdemand for Aramco’s issue, expected next week.
Saudi Energy Minister Khalid al-Falih said earlier this yearAramco would raise around $10 billion, but the final amount willbe determined by market demand.
Aramco is largely expected to offer investors a slightpremium to what Saudi government bonds are offering, as that isgenerally the case with government-owned entities.
But the mismatch between its rating and its staggeringfinances has presented investors with a pricing dilemma.
“It has more of a double-A credit profile than the single-Arating it has,” said Samy Muaddi, emerging markets portfoliomanager at T. Rowe Price.
“But you have to keep in mind that if the sovereign were toget into trouble, there are some financial resources, whetherthey be through royalties, taxes, or dividends, that could betaken from Aramco.”
Aramco has insisted on its independence over the past fewdays. In an online presentation seen by Reuters, a companyexecutive said that even when oil prices declined to $45 abarrel in 2016, the kingdom remained committed to Aramco’sgovernance framework to safeguard its independence.
“The government borrowed on its balance sheet for its budgetneeds with no ask of or interference to Aramco," thepresentation said.
INVESTMENT STRATEGY
Aramco said last week it had agreed to buy the 70 percentstake held by the Saudi Public Investment Fund (PIF) in SaudiBasic Industries (SABIC) for $69.1 billion, one of the largestdeals in the global chemicals industry.
While the firm said in the presentation the bonds would notbe used to fund the acquisition, many investors believe the debtplans are linked to the purchase, which will give PIF, the mainvehicle for Crown Prince Mohammed Bin Salman's plan to diversifythe Saudi economy away from oil, cash to push through itsinvestment strategy.
“There is a clear connection with the sovereign, it ishighly coordinated policy, particularly in terms of productiontargets and in some cases the price of oil and where they wantto sell oil,” said Ray Singh, vice president, diversified fixedincome at Eaton Vance.
According to Ashmore’s Dehn the “seamless” relationshipbetween Aramco and the government is positive for investors.
“I would imagine they would be coordinating withthe Saudi debt management office as the government and Aramcoare pretty similar issuers and Aramco’s issue would cannibalizethe government to some extent and reduce the Saudi governmentweighting on the JPM index.”
Some bankers and fund managers expect Aramco to issue up to$30 billion or $40 billion in bonds, but company representativeshave not discussed a firm target during the roadshow.
This would allow it to focus on obtaining the right pricingwithout creating larger supply expectations that would impactits cost of borrowing in future issues.
Also, had Aramco announced an even larger transaction than$10 billion, this could have put some pressure on Saudi Arabia’sdebt curve, as some investors would switch Saudi sovereign paperfor the upcoming Aramco securities.
“But more importantly it would change the narrative Aramcoput forward around the SABIC acquisition and the governanceframework with the government as shareholder,” said MohieddineKronfol, chief investment officer of Global Sukuk and MENA FixedIncome at Franklin Templeton Investments.
“A large bond deal may imply a transfer to PIF as the mainmotivation rather than the opening up of Aramco."
(Additional reporting by Reporting by Kate Duguid in New Yorkand Davide Barbuscia in DubaiWriting by Davide BarbusciaEditing by David Holmes)
