Breakingviews - Aramco’s next stop will be bond, not stock, market

Aramco employees walk towards an Aramco private flight at Aramco private airport in Dammam, Saudi Arabia May 22, 2018.

LONDON (Reuters Breakingviews) - Saudi Arabia’s Plan A for its crown jewel hasn’t gone to plan. The kingdom’s original goal of selling 5% of energy giant Saudi Aramco in an initial public offering to foreign investors at a $2 trillion valuation got downsized to a 1.5% offload to largely domestic punters at $1.7 trillion. That implies Saudi’s Public Investment Fund might only get about a quarter of the $100 billion it originally envisaged to help diversify the country away from oil.

With the stock rising 10% on its debut, the obvious next step would be to flog more of it. Aramco’s prospectus allows it to sell more to sovereign wealth funds before the lockup period expires in a year. But foreign investors largely rejected the current valuation. Depressed demand will meanwhile keep a lid on crude prices and hence Aramco’s valuation next year, despite oil producers further cutting supply.

Crown Prince Mohammed bin Salman has other options to finance his Vision 2030 plan, though. In 2016, the Public Investment Fund received 100 billion riyals ($27 billion) from a raiding of the Saudi Arabian Monetary Authority’s $500 billion of foreign-exchange reserves. If the monarch raised the same again, the authority would still have enough cash to protect the riyal’s peg to the dollar. Meanwhile cash from Aramco’s recent $69 billion acquisition of a majority stake in chemicals group SABIC should start to flow into the public coffers. Assume another $25 billion is made available to the Public Investment Fund.

That would leave an extra $20 billion or so to be found down the back of the sofa if need be. In its IPO prospectus Aramco mentions that gearing – net debt divided by balance sheet capital – will rise above its 15% comfort level immediately after SABIC closes. But with $273 billion of equity and borrowing costs in line with the sovereign, Aramco could afford to raise another $20 billion in the bond market and keep leverage at manageable levels. With 98.5% of the company, Saudi could argue for a big special dividend.

None of this is as good as a successful overseas listing. The IPO was also supposed to be about bolstering foreign direct investment inflows, which languish around 0.5% of GDP. But SABIC has already shown the crown prince’s capacity for improvisation. If he needs money quickly, the crown prince will tap the debt markets rather than risk another flawed stock offering.

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