UPDATE 5-Saudi Arabia raises 3 billion with debut euro bond

(Recasts, adds final pricing)

DUBAI/LONDON, July 2 (Reuters) - Saudi Arabia has raised 3 billion euros from over 14.5 billion worth of orders for it first bond denominated in euros, as the kingdom taps new financing sources to cover its budgetary needs in an era of lower oil prices.

With this deal, the Saudis have sold over $60 billion in international bonds since their debut as a global borrower in late 2016, making the kingdom one of the biggest debt issuers among emerging markets.

Its foray in the euro debt market -- the first by a Gulf government -- will allow it in the future to tap different investors at different times.

The Saudi bonds are split into a 1 billion-euro eight-year tranche and a 2 billion-euro 20-year tranche, a document issued by one of the banks leading the deal showed.

“Saudi Arabia will benefit from strong tailwinds as there’s good demand for euro-denominated paper driven by European investors looking for alternatives to very low yields in government bonds in Europe,” Marcelo Assalin, head of emerging market debt at NN Investment Partners, a Netherlands-based asset manager, said while the deal was being marketed.

The eight-year tranche carries a coupon of 0.75%, the longer-dated bond 2%. After pricing, the eight-year tranche offered a 0.782% yield, the 20-year notes 2.042%, according to the document.


Spreads on the eight-year bond tightened as the deal was marketed on Tuesday to end up offering 80 basis points (bps) over mid-swaps. The 20-year bonds offered 140 bps over the same benchmark.

That meant the yield in euro terms was lower than rates offered by Saudi Arabia’s dollar debt of similar maturity. But compared with euro debt issued by lower-rated countries like Croatia, Saudi Arabia was offering a slight premium.

“It comes a bit cheap to comparisons ... It’s a debut euro issue and comes in the backdrop of Iran tensions, so that perhaps accounts for that,” said a portfolio manager.

Geopolitical tensions have increased in the Middle East since attacks on two oil tankers at the entrance to the Gulf. The United States blamed Iran; Iran denied responsibility.

Saudi Arabia’s budget deficit this year is expected to reach 7% of gross domestic product, the International Monetary Fund predicted, above the government’s projection of 4.2% of GDP.

The increase is mainly caused by higher government spending, which Riyadh needs to boost the economy and diversify it away from oil revenues, at the cost of heightening the kingdom’s fiscal vulnerabilities.

Goldman Sachs and Societe Generale coordinated the deal while BNP Paribas, Morgan Stanley and Samba Capital were mandated as lead managers and passive bookrunners. (Reporting by Davide Barbuscia and Tom Arnold; editing by Larry King)