• A strong start to the year for Saudi bonds denominated in euro .. turnout is 19 points away from the zero interest


    Al-Eqtisadiah from Riyadh
    Euro-denominated debt instruments issued by the Saudi government recorded a strong credit start at the beginning of the new year during their secondary trades on the London Stock Exchange.
    Data from the IHS Markit platform showed that Saudi Arabia’s twentieth bonds were trading at 109.16 cents per euro on January 1, and the investors ’appetite for acquiring Saudi Arabia’s euro currency bonds (with an eight-year term) contributed to making it 19 basis points away from zero interest after investors were forced Europeans to look for positive returns from sovereign bodies with high financial solvency and strong creditworthiness.​
    Those working in fixed income markets noticed an increase in demand for Saudi Arabia's only two issuances in euros (as it is among the safe havens in emerging markets) after negative global debt exceeded $ 18 trillion for the first time last month.
    The historical data of the IHS Markit platform revealed that eight-year bonds recorded the lowest historical return at 0.14 percent in the first quarter of last year, making Saudi Arabia the closest Arab country to join the list of negative debt issuers.

    European comparison
    And the performance of Saudi Arabia's success in containing the pandemic and the improvement of economic indicators in paying Eurobonds to achieve annual gains that exceed what the index of measuring currency bonds of the same major economies of the euro area achieved.
    While 20-year bonds posted an annual gain of 3.59 percent over 2020, the IBOX index, which measures the performance of euro-denominated sovereign bonds, was 2.8 percent over the same period.
    Bearing in mind that this index contains the bonds of major European countries, including German government bonds, which are a benchmark of quality on the continent, given that they are equivalent to US Treasury bonds, because they provide the most secure guarantees, and are basically risk-free.
    The 20-year bond outperformance was repeated with the iBoxx EUR Overall Emerging Markets Index, which ended last year with a slim gain of 0.14 percent. Knowing that Saudi Arabia’s eight-year bonds returned by the end of 2020 gains of 0.35 percent during European trading.​

    Asian comparison
    The monitoring of the economic reports unit showed that European investors preferred Saudi Arabia’s 20-year bonds over their same-term Chinese counterparts, which are trading at 101.7 cents per euro, compared to 109.1 cents per euro for Saudi bonds. Knowing that Saudi Arabia is partnering with China, the largest economy in the world, with a credit rating score (A1, issued by Moody's).
    The survey also revealed that Saudi Arabia has become the second country in the Asian continent (with a credit rating category A and above), which trades 20 euro bonds at these current levels, surpassing Korea, which trades its bonds at 108.3 cents per euro.
    The analyzes of the Economic Reports Unit on the yield curve, prices and returns of debt instruments in euro for Saudi Arabia were based on several sources, namely the IHS Markit Financial Services platform, which is one of the most popular financial analysis platforms, which the global investment community uses to evaluate securities and build investment decision-making as well as the C Cbonds, whose platform is used by fixed income marketers to track the movement of global credit market indices

    Price distortion
    With sustainable negative interest rates on long-term debt, insurance companies, pension funds, and commercial banks that take up deposits are re-balancing their portfolios of safe-haven assets.
    The outstanding performance on the twenty-year bonds reflects the clear demand for these securities after European investors sought a positive periodic dividend yield.
    The price distortion "of the prices of debt instruments and the entry of some of them into negative territory" came after most central banks adopted a strategy of quantitative easing. In July 2019, Saudi Arabia issued its first issue of fixed-income instruments denominated in the European currency, after the total offering amounted to three billion euros (equivalent to 12.70 billion riyals).​
    The offering was divided into two tranches, one billion euros (equivalent to 4.2 billion riyals) for eight-year bonds maturing in 2027, and two billion euros (equivalent to 8.4 billion riyals) for 20-year bonds maturing in 2039.
    It is known that the final return of the eight-year tranche amounted to 0.75 percent, "paid annually," while the final return of the 20-year tranche was 2.00 percent.
    In July 2019, Saudi Arabia became the first Gulf country to issue bonds denominated in the currency of the European region and the sixth Arab country to use the euro with its borrowing program, after Egypt, Morocco, Algeria, Tunisia, and Lebanon.

    European investors
    The geographical distribution of Saudi Arabia's issuance of euro-denominated bonds revealed a remarkable presence for German, Italian and Swiss investors.
    British investors also strengthened their traditional presence with previous Saudi issuances when they grabbed the first place, which was usually reserved for US investors with dollar-denominated issuances, with an allocation rate of "both tranche" of 28 percent.
    And the Germans ranked second in terms of allocation, with 22.5 percent.
    There was also a remarkable presence of Italian and Swiss portfolios, with an average allocation rate of 17%, while asset managers had the highest investor quality allocation at 57.5%.​
    And it became clear that Saudi Arabia had achieved its goal of finding new investors in new pockets, as the euro-denominated issue witnessed the entry of new liquidity that is seen for the first time with Saudi issuances, which is liquidity coming from investors, who focus on a specific class of investment-grade assets, as well as entering liquidity from funds. The specialist, which invests only in the euro currency, and this last category cannot buy Saudi sovereign bonds "denominated in dollars" under the investment restrictions that govern the fund's activities.
    It was also noticed that hedge funds existed when they bought 6.5 percent of the bonds, which means that these funds are betting on future oil prices.
    The allocation of 10 percent to European governments and central banks means those parties' confidence in Saudi Arabia and its economic reform plans.​

    European insurance companies
    With sustainable negative interest rates on long-term debt, insurance companies, pension funds, and commercial banks that take up deposits are re-balancing their portfolios of safe-haven assets.
    About 5 percent of European insurance companies' assets (equivalent to 250 billion euros) are invested in fixed-income instruments, compared to 2 percent five years ago, according to Reuters data.
    The increase in demand in secondary markets for higher investment grade issues in emerging markets has prompted some European insurance companies to replace their holdings of negative bonds to their euro-denominated counterparts issued from countries outside the European Union such as Korea, China, and Saudi Arabia, as there is an "inverse relationship" between the rise The prices of those securities and the lower yield.​

    Reuters reported media statements by officials of asset management to the French bank BNP Paribas and its Swiss counterpart, UBS Asset Management, saying that they do not tend to keep negative-yielding bonds in their portfolios while avoiding buying them and moving towards bonds with yields. The attractor.
    The European euro’s liquidity trend towards emerging market bonds contributed to making some Eurobonds issued from Korea and Mexico record negative interest during secondary trading in the fourth quarter of 2019.

    And those working in European debt markets reported earlier that the promotional tours of bonds in countries such as Saudi Arabia and Ukraine had witnessed the participation of German, Italian and French insurance companies. These companies prefer exposure to euro-denominated bonds rather than investing in dollar-denominated bonds and exposure to foreign exchange risk.

    Euro Dollar Swap Contracts
    Previous monitoring of the newspaper about the issuance of countries in emerging markets revealed that some of those economies, which peg their currency to the dollar and do not have existing commitments to the euro, are using contracts that allow the proceeds of issuing euro-denominated bonds to be replaced by the dollar currency, in a move that leads to higher costs of issuance.
    One of the bankers in the banks that arranged the issuance of the euro to Saudi Arabia confirmed to the British newspaper "Global Capital" that "Saudi Arabia has commitments in the euro and will not enter into contracts to replace the euro" (coming from the issuance proceeds) with the dollar currency known as the euro-dollar swap.
    The presence of “liabilities” similar to the size of the Eurobond issuance is positive for three reasons. The first is that this is considered a natural hedge, given that the Kingdom spares the exchange rate risks between the euro and the dollar (because the presence of euro cash flows is a result of the commitments established by Saudi Arabia).​

    The second matter is that not using these contracts means an abundance of issuance costs. Creating commitments in the euro means that these commitments may be in the form of anticipated investments by the government (or its funds) in the European continent, or euro-denominated payments, or even projects.
    On July 2, 2019, during its special coverage of the issuance of Eurobonds, Al-Eqtisadiah indicated that the entity that manages “bond indices”, namely GB Morgan emerging market bond indices, that the next Saudi issuance is eligible to join the bond index. The euro is known as EURO EM - BIG.
    I mentioned at the time that this accession is expected to boost the demand for the Saudi issue during secondary trades after the two tranches are listed.
    It stated that the return of the eight-year segment is the lowest recorded in the history of Saudi international issuances denominated in hard currencies, and the newspaper assumes that using the proceeds of issuance denominated in euros and directing them towards purposes denominated in the same currency of issue, without the need to replace the issuance currency with another currency.
    Despite the varying sources, which determine the actual number of countries falling under the name of "emerging or emerging markets", there is consensus that the number of these countries ranges between 38 countries and 45 countries, including the Gulf states, Russia, China, Korea, and India.
    On the other hand, the National Center for Debt Management indicated during its description of the annual borrowing plan for 2020 that the external debt portfolio is that the euro-denominated debt is less than 2 percent of the total debt portfolio at the end of 2019.
    The center may examine opportunities for external issuances in currencies other than the US dollar, according to international market conditions and supply and demand factors. The Kingdom is distinguished by its large reserves of foreign currencies, and it has a stable exchange rate policy.​

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