"I Don’t See The Logic": With Aramco IPO Dead, Saudis Come Up With A Creative Way To Raise Billions

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.

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%, 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,

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 Sillicon Valley millionaires every day, the Saudi economy is on the verge of collapse.


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 bankersm 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.