The Aramco IPO may now be history, put on indefinite hold several weeks ago, but Saudi Arabia's funding needs have never been greater. As a result, 32-year-old Crown Prince Mohammed bin Salman, aka MbS, has come up with a "novel" scheme to raise tens of billions for the government. According to the WSJ, the de facto Saudi leader is forcing urging Aramco, also known as the Saudi Arabian Oil Company, to raise debt to buy a controlling stake in a petrochemical company from the country’s sovereign-wealth fund. The money would then go to the government - whose latest fund-raising strategy, we remind readers, was to round up the country's oligarchs and hold them in a "hotel" until they paid up - to be spent as MbS sees fit.
Should the deal go through, and there are many reasons why it won't, it would give the Public Investment Fund between $50 billion and $70 billion for all or part of its stake in Saudi Basic Industries, or Sabic. Controlled by the state, Sabic is also the country’s largest publicly listed company, with a market cap of about $100 billion.
Simplifying the money flow: the cash goes from international yield chasers, to a consortium of banks, to Aramco, to Sabic, to the Saudi government.
Two things here:
• First, nobody besides MbS wants the deal. Aramco Chairman Khalid al-Falih "has long been opposed to a deal for Sabic" the WSJ sources said. Meanwhile, Sabic executives worry that the company "would lose its identity in any deal."
• Second, in the absence of an Aramco IPO, Saudi Arabia really has no option; Prince Mohammed’s advisers see a deal between the kingdom’s two largest companies as central to remaking the economy.
And the Saudi economy desperately needs remaking: even though oil prices recently have risen, following the 2014/2015 oil price crash which forced the government to inject billions into the economy (and liquidate more billions in reserves) to keep the populace content and the economy operating, the government is running a massive budget deficit this year after announcing the biggest fiscal stimulus package in the country’s history. Related: Oil Prices Set For First Weekly Gain In Four Weeks
This proposed transaction would supply the Saudi Public Investment Fund with much-needed cash in what the WSJ dubs an "unusual funding strategy" that underscores just how desperate for money Saudi Arabia has become... and that assumes oil remains in the $70-$80 range, which is a pipe dream if the global economy suffered from even a mild slowdown in the coming quarters.
In any case, Aramco is already preparing for the deal and has begun seeking billions of dollars in loans from international banks to finance the Sabic deal, according to people familiar with the matter.
That debt could be lent in three parts, with the first tranche of up to $10 billion likely to be raised this year, these people said.
If Aramco goes ahead with an international bond - potentially among the biggest ever done by a corporate issuer according to Bloomberg - the sale would force the world’s largest oil producer to disclose its accounts to investors for the first time since nationalization four decades ago as well as many other details about oil reserves and operations, and the main reason why the Aramco IPO was pulled in the first place.
And as a Plan B in case banks don't fall for this scheme, Aramco is also looking to raise money on the international bond market, which however would also open the country's accounts up to scrutiny from investors.
It wouldn't be the first time: two years ago, Saudi Arabia turned to the international debt markets for the first and has since raised at least $40 billion in sovereign debt to fuel spending. In doing so, it has increasing its debt to GDP ratio to 19 percent, but in comparison to the rest of the world's insolvent nations, that ratio makes the Saudis look outright frugal. Saudi Arabia has set itself a limit to clear its fiscal deficit by 2023, although one you pop (your bond market cherry), you don't stop. With or without Aramco, Riyadh is expected to raise billions more in debt this year.
The same goes for Aramco, which -for now - has only a modest debt load compared to other global oil giants, such as Exxon Mobil and Royal Dutch Shell, making it relatively easy for the Saudi firm to borrow cheaply, even though Aramco doesn’t disclose financial results and just like China, nobody really has any clue what is on the company's books. In fact, the risk of opening itself up is why Aramco decided against the IPO in the first place.
A deal for a stake in Sabic would also allow Aramco to expand its petrochemical operations. The Saudi government also has earmarked Aramco’s shift from a supplier of crude oil to an integrated energy firm as a key pillar of the country’s diversification away from oil.
Meanwhile, in the bizarro financial labyrinth that is Saudi Arabia, the country's Public Investment Fund also needs the cash to fund ambitious plans, including building several cities and investing in non-oil sectors like mining and tech. Related: The 4 Key Chokepoints For Oil
In October, the PIF said it managed $225 billion of assets, but it isn’t clear how much of that wealth can be easily deployed. PIF also is in discussions with international banks about a loan worth billions of dollars in a process that is separate from the talks about Aramco buying PIF’s Sabic stake, said bankers involved in the process.
And then there is the ridiculous: the fund is the biggest investor in SoftBank Group ’s $100 billion Vision Fund, making the kingdom one of the world’s biggest technology-company investors. So while on one hand Saudi Arabia is making hundreds of Silicon Valley millionaires every day, the Saudi economy is on the verge of collapse.
Brilliant.
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Others are just as perplexed by what is going on:
Raising debt from international banks instead of equity from foreign investors adds greater risk to Saudi Arabia’s strategy to use the PIF to diversify the economy, said Ali Shihabi, the founder of Washington-based think tank Arabia Foundation.
“Aramco is going to have to borrow this money to fund PIF,” said Shihabi, who previously worked in Riyadh as a banker. “I don’t see the logic behind it.”
And if local bankers don't see a "logic" why would foreign bankers? Unless of course the underwriter fee is in the double digits; in that case there will be a line of managing directors pitching their bank's unique skills in selling crap to widows and orphans.
By Zerohedge
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Saudi investments in the United States could be at risk by the legislation passed overwhelmingly by the US Senate and the US House of Representatives in 2016 that would allow families of September 11 victims to sue the Saudi government for damages over 9/11. The law allows the removal of the sovereign immunity preventing lawsuits against countries whose citizens were found to be involved in the attacks. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen.
Another major reason is because foreign investors would not even consider the IPO without an independent auditing of Saudi proven reserves. This raises the question as to how large are the Saudi proven oil reserves.
Saudi Arabia claims that its proven oil reserves stand at 266.2 billion barrels (bb), the world’s second biggest after Venezuela’s when I and other experts have estimated them as ranging from 74-80 bb.
And while there is some merit in Saudi Aramco expanding its petrochemical arm with the intention of becoming a fully integrated company, it is a circuitous way for the Saudi government to force Aramco to raise debt to buy a controlling stake in another government-owned company like Sabic with the proceeds of the sale going to government coffers. The Saudi government could have borrowed the money straight in the domestic market or the international money market. Still, this unusual funding underscores just how desperate for money Saudi Arabia has become.
Moreover, the Saudi Arabia government could have raised the money from eliminating the remaining subsidies on gasoline, water and electricity thus saving almost $80 bn or reaching a peaceful settlement for the conflict in Yemen costing it currently an estimated $72 bn a year and also threatening Saudi oil shipments through the Strait of Bab al-Mandeb.
And yet Saudi Arabia did not hesitate to raise its oil production against the wishes of OPEC and against the vital interests of its own economy in response to President Trump asking it to increase production in case US sanctions against Iran led to a shortfall in Iran oil exports thus preventing oil prices from surging up steeply. It transpired later that President Trump's request has nothing to do with US sanctions on Iran and everything to do with preventing his own party losing the mid-term Congressional elections in November because of rising oil prices offsetting his tax cuts. Saudi Arabia and the majority of OPEC members need an oil price of $80-$100 a barrel to balance their budgets.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London