• Saudi Arabia gets the third lowest yield of 40 dollar bonds in the market


    Al-Eqtisadiah learned from government sources close to the National Center for Debt Management that the dollar issue, which was closed late last week, contributed to tightening the Kingdom’s obtaining of low fixed returns for the maturities that are due in 2033 and 2061. The final pricing of the annual returns for the five billion dollar issuance came at 2.25 percent for the 12-year tranche, as well as 3.45 percent for the 40 bonds issued by Saudi Arabia for the second time in its history.

    An analysis conducted by the reports unit in Al-Eqtisadiah newspaper on the forty-day editions of emerging and developed market governments showed that Saudi Arabia got the third lowest dollar return of 3.45 percent out of nine issuers that have outstanding dollar bonds.
    Peru ranked first in terms of the lowest return with 2.7 percent, followed by Chile at 3.10 percent, both of which are from Latin America, which enjoys low credit margins under the region's distance from geopolitical risks.
    The sources familiar with the debt file added, "The two double tranches that were chosen together contributed to extending the average maturity period of the debt portfolio."
    The National Debt Management Center stressed during its annual lending plan document that, during its financing activities, it will carefully maintain the average maturity of the Kingdom's public debt and reduce the risks of refinancing, noting that the average maturity period of the debt portfolio increased to 9.4 years at the end of 2020 compared to 8 7 years in 2019.
    Bankers working in fixed income markets evaluate the success of issuances through several aspects, the most important of which is the pricing aspect and how it is managed by the issuers.
    Regarding Saudi Arabia not choosing the 50-year segment after its first appearance in the region with the issuance of two Gulf parties, government sources close to the public debt management strategy indicated that choosing the 50-year segment is subject to market conditions, and at present, it has been preferred to go with the 40-year segment. 

    Pricing side analysis
    A monitoring report by Al-Eqtisadiah concluded that Saudi Arabia was able to price its bonds within its sovereign yield curve. The strategy adopted during the three pricing rounds during the stages of receiving investors ’requests would spare the state treasury paying a premium for issuance.
    The monitoring showed that the fair value of the credit margins for the 40-year segment was between 206 to 202 basis points, but that the final margin came at 164.4 basis points, which means that the segment was priced at a discount below the fair value, and this matter is in the interest of the state treasury, as it mixed The pricing strategy is bold with this segment after credit spreads were compressed to exceptional levels.
    As for the other dollar segment, the newspaper's monitoring of the fair value of the 12-year tranche was between 133 to 129 basis points, but the final pricing came at 130 basis points above US Treasury bonds, in an indication that the segment was priced at fair value or what Write it down a little.
    Collectively, these data mean that the current prices show that Saudi Arabia has obtained a low borrowing cost equivalent to the levels before the Corona crisis, and this in itself is an indicator of investor confidence in the quality of the Kingdom's creditworthiness.
    It is noteworthy that the Kingdom has a rating of "A1", and this classification is the fifth-highest among the classification degrees of up to 24.

    Version Strategy
    The Kingdom's strategy was mainly to choose the ideal timing for issuance within limited hours, as a result of which the avoidance of issuance premiums resulted during a time when advanced and emerging economies are facing the consequences of the pandemic.
    As Saudi Arabia closed its dollar issuance in recent days, Saudi Arabia demonstrated the confidence of international investors in the strength of its economy and the ability of the largest economies in the region to overcome the consequences of the pandemic.
    A “new issue premium” among fixed-income instrument bankers means that in normal times the issuer is expected to pay a premium over the fair value of between five and 15 basis points, and in some cases, the issue is made without a premium or the issue is priced within the fair value of The revenue of the issuer.

    However, after the Covid-19 financial crisis, issuers are paying an unnatural and exorbitant price premium to borrow in these difficult times, especially during the first months of the pandemic.
    The good and continuous performance of the prices of Saudi debt instruments listed on global stock exchanges, coupled with the presence of an appropriate issuance window at these times in the global markets, has pushed the employees of the National Debt Management Center, on behalf of the Ministry of Finance, to take the rapid issuance decision that is traditionally closed in less than 20 hours.
    Al-Eqtisadiah's analyzes of pricing, in its two parts related to credit margins and final returns for the dual issuance of Saudi Arabia, were based on several data sources specializing in fixed income instruments, such as the Bond eValue financial platform for tracking the prices of instruments and its counterpart, C-Bonds, as well as the specialized REDD platform In-depth analysis of fixed income instruments in emerging markets.
    Before the recent issuance of the kingdom, a research note by Morgan Stanley indicated that Saudi Arabia is likely to issue about $ 14.5 billion in debt instruments for this year, according to Bloomberg.
    In the same context, the platform "Credit Sites", which specializes in preparing independent research notes in credit affairs, indicated that the sovereign bodies in the Middle East and North Africa accounted for 51 percent of the total number of new issuances last year.
    This region and sovereign issuers in Latin America accounted for up to 80 percent of the total of those issuances amounting to $ 159 billion.
    In a statement, the National Debt Management Center announced the completion of receiving investors' requests for its eighth international bond issuance within the Kingdom's international debt instruments issuance program, and the total of subscription requests reached more than $ 22 billion, and the coverage ratio exceeded more than four times the total issue.

    Benefits management
    Monitoring the economic reports unit showed that the five billion dollar bond segments were chosen with high accuracy to avoid exposing Saudi Arabia to the accumulation and concentration of repayment payments during certain years.
    The newspaper’s monitoring, based on data from the Fact Set platform, revealed that Saudi Arabia deliberately chose the years 2033 and 2061 due to the absence of dues from public debt instruments that must be paid during that period, except issuing the 880 million riyals that took place in January of 12-year riyal-denominated Sukuk. This strategy contributes to achieving balanced management of maturity liabilities.
    Saudi Arabia continued its previous approach to managing its sovereign debt when it preferred long maturities with its local propositions by the end of 2020, intending to achieve balanced management of debt maturity liabilities that would avoid the concentration of these issues during a certain period of time.
    The National Center for Debt Management always attaches great importance to the issue of choosing the appropriate maturities with the new theses, and the reason for this is due to the distribution of debt entitlements “debt service” and avoiding its concentration in specific years.
    The distribution of debt service periods over a long number of years contributes in a way that does not cause pressure on the state treasury when it comes to repayment of a large number of debt instruments during a given fiscal year.
    It is reported that FactSet has one of the most popular financial analysis platforms that the global investment community uses to evaluate securities and build investment decision-making.

    The importance of measurement indicators​
    Most of the sovereign debt instruments are priced using the benchmark index, which is the yields of US Treasury bonds, or "to a lesser extent" indicators of "average swap contracts", where the returns of those bonds are included with the pricing system for sovereign debt instruments.
    When the process of building orders for issuance begins, investors pay attention to two factors, the first being the issuer's credit spreads, and the second is the benchmark rates, according to the target maturities.
    When these numbers are combined, ie "credit margins" with the "measurement index", the final yield known as yield is obtained when the issue is closed, bearing in mind that credit margins go through three rounds of indicative prices before those numbers are reduced with each round, depending on the size Investor appetite for the issue.

    Dealing from a position of strength

    Mohamed Al-Jadaan, Minister of Finance, Acting Minister of Economy and Planning, said last year that the Kingdom is facing the current global crisis from a position of strength, given the strength of its financial position and its huge reserves, with relatively low government debts.
    He pointed to the need to follow financial and monetary measures that contribute to creating the appropriate conditions for a rapid economic recovery, with the importance of being specific in the goal and duration, and characterized by transparency to contain financial risks and vulnerabilities to debt tolerance.
    He stressed that all the initiatives taken by the Saudi government will help maintain the stability of the national economy and enhance confidence in its strength, indicating that the Kingdom's government is closely monitoring the overall situation, and is ready to provide more support if necessary.

    low down debt growth
    Saudi Arabia targets a slowdown in the growth of public debt in the medium term, to complement the government's efforts to enhance spending efficiency and achieve fiscal discipline targets.
    The Ministry of Finance expected that the size of the public debt for the 2020 budget will reach about 854 billion riyals, compared to previous estimates of 754 billion riyals, after the Corona crisis that affected the economies of the whole world and pushed the public debt above the target level, especially after the Minister of Finance confirmed that the government will increase Borrowing this year to tackle the pandemic.
    The fiscal policy in Saudi Arabia aims to achieve a balance between the objectives of maintaining financial stability, promoting sustainable economic growth, and supporting the stage of economic and social transformation that Saudi Arabia is going through, by the Saudi Vision 2030
    Besides, Mohammed Al-Jadaan, Minister of Finance, indicated during the announcement of the 2021 budget that Saudi Arabia was able during the past four years to achieve very large financial control, as Saudi Arabia faced the Corona crisis with high professionalism, with the world's testimony.
    Al-Jadaan indicated that more than 350 billion riyals have been saved through raising the efficiency of spending since 2017 and that he was able to preserve the global economy through good management of the energy crisis.
    Returning to the public debt, the Ministry of Finance expected the volume of debt issuances in 2020 at 220 billion riyals, with a total of 100 billion riyals in addition to the approved plan issuances.
    The data indicate that the growth rate of public debt during 2020 is 26 percent compared to the size of the debt during the year 2019, as the global pandemic affected the state's public revenues and expenditures, especially with the decline in oil prices, while the target for public debt growth was about 11.2 percent before the pandemic.

    Gulf debt market developments

    The month of January witnessed several international issuances from Gulf and Saudi authorities. The total international issuances coming from emerging markets, including the Gulf region, amounted to $ 23.7 billion, as of January 25, according to data from the credit research firm, CreditSights

    As for the most prominent events that have caught the attention of workers in international debt markets about corporate issuances in emerging markets that have taken place so far, the REDD platform, which specializes in in-depth analyzes of fixed income tools in emerging markets, cited unnamed banking sources about some investors exiting Among some transactions "during the order building/opening of purchase order books for bonds", the issuers price the credit margins of their bonds at levels that exceed what investors see as a fair value, is an indication that the issuers do not set a price premium as was previously done, after an improvement market condition​.

    The "RED" platform added that "as a result, some investors changed their strategy by buying those same issues in the early days of their trading in the gray market, in the hope that they trade below their face value."

    Economic Reports Unit ​

© All Rights Reserved for Asharqia Chamber