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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Saudi Aramco IPO Has Investment Banks Flocking to Riyadh

It’s a rough time to be an investment banker. Between Brexit crippling Europe and China worries depressing U.S. firms, investment banking transactions volume has been relatively weak leading to major declines in stock prices of firms like Greenhill and Moelis. That weakness is even a problem for top tier investment banks like Goldman Sachs and Morgan Stanley. In fact, the one place where new opportunity seems to be rising is perhaps the last place many bankers would have expected a few years ago – Saudi Arabia.

As Bloomberg puts it, every banker in the world is pursing deals in The Kingdom right now. At the top of that list for bankers is getting a piece of the work involved with the Saudi Aramco IPO. Saudi Arabia has paid out $100 million to investment banks in fees during the first five months of the year, a 30 percent increase. The Saudi Aramco IPO alone should generate roughly $50 million in fees, but the opportunities don’t stop there.

Beyond the potentially $2 trillion Saudi Aramco IPO, Saudi Arabia is looking at selling hundreds of state assets in a bid to bolster its finances, reduce its dependence on oil, and create a modern twenty-first century economy. These deals will require not only advisory services on sales and deal structuring, but the sale of potentially up to $15 billion in bonds. Related: Oil Tanks On ‘Disappointing’ Inventory Draw

All of the opportunities are leading many banks to hire new staff and bulk up their relationships in Saudi Arabia. HSBC and JPMorgan Chase are doing particularly well thus far. HSBC is working on the privatization of the Saudi Stock Exchange and the potential split up of the Saudi Electric Co. JPMorgan, HSBC, and Citi will all be involved in the Kingdom’s first international bond sale, which could open the door to future business from other Saudi groups.

None of this would be a big deal for investors if it weren’t for the fact that the sale of Saudi securities is so groundbreaking. Traditionally, there have been relatively few major publicly traded Saudi stocks - just a couple dozen. The same holds true for most other Middle Eastern countries. As a result, investors have not had much ability to get exposure to opportunities in an important area of the emerging markets. Related: Shrinking Chinese Demand About To Slam Oil Prices

To be sure, there is a Saudi Arabian ETF from MSCI, but it has assets of just $4.5 million and usually trades around 5,000 shares a day at a price per share around $20, making it an ineffective investment for all but the smallest of stock market investors. As Saudi Arabia starts to modernize and privatize its economy, that lack of investment opportunities should change.

The result will ultimately be a stronger Saudi Arabian economy with a deeper reserve of capital. With privatization will come new pressures though, including the pressures of meeting investor expectations and the restrictions of bond covenants. As a result, many Saudi firms will have to learn to be more efficient and to focus on maximizing profits rather than focusing on social stability and the welfare of various Saudi royals that might be involved in the business. It will be a momentous change in the way the country does business and it creates a major opportunity for dozens of financial firms at a time when many are hungry for work.

Michael McDonald of Oilprice.com

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