At the end of July, not long after Saudi Arabia confirmed that the IPO of Aramco has been postponed indefinitely, we reported that the 32-year-old Crown Prince Mohammed bin Salman, had come up with a "novel" scheme to raise tens of billions for the government. According to the WSJ, the de facto Saudi leader was "urging" Aramco, also known as the Saudi Arabian Oil Company, to raise $40 billion in 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 have gone through, and we explained why there are many reasons why it won't, it would have given 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.
Needless to say, many were perplexed by this idea: 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.”
Well, less than four months later, it appears that nobody else did either, because as the WSJ reported this morning, Saudi Aramco no longer plans to launch what would have been one of the world’s largest-ever corporate-bond sales to fund a roughly $70 billion stake in the kingdom’s national petrochemical firm.
The sticking point? The same as the reason behind the pulling of Aramco's IPO: fears about what public disclosure as part of the deal would, well, disclose.
Saudi Arabian Oil Co., as the company is officially known, had considered issuing up to $40 billion in bonds to help buy 70% of Saudi Basic Industries Corp., The Wall Street Journal has reported.
But people familiar with Aramco’s financing discussions say the oil firm is now worried about the level of disclosure required for a bond issue and whether the uncertain outlook for the oil market might damp demand for debt or increase the cost of borrowing.
Although not as detailed as an IPO, a corporate bond sale on international markets would typically require a company to publicly disclose three years of audited financial statements and highlight key risks to operations. This level of disclosure requirements has been a problem for Aramco, which doesn’t disclose income statements, and its balance sheet is a black hole for analysts.
Meanwhile, there are also the "recent development": Aramco also raised concerns that the recent diplomatic fallout from the murder of Saudi dissident journalist Jamal Khashoggi might affect investors’ appetite for Saudi debt.
So now instead of a bond - which would have ultimately been used to fund PIF - Aramco is now looking at a combination of other potential financing options.
One option is to take advantage of the ongoing euphoria in the leveraged loan market. WSJ sources said that Saudi Arabia could organize a syndicated loan with banks and use Sabic’s balance sheet to raise debt - which unlike a bond, would be secured by assets - to pay for some of the roughly $70 billion cost. The oil firm also could reduce the amount of cash it pays in royalties to the Saudi finance ministry for public spending and instead transfer money to PIF, or stagger payments from its cash flow to the fund over time.
Naturally, in addition to a disappointed Saudi royal family, the end of the potential bond sale will lead to a few frowns on Wall Street: the record bond sale had excited bankers hoping to win a place arranging the capital raising.
JPMorgan and Morgan Stanley are already acting as advisers for Aramco on the Sabic purchase and Goldman Sachs and Bank of America Merrill Lynch are working with PIF, according people familiar with the matter.
Banks can also blame the drop in oil prices, because as the WSJ adds, Aramco executives are also concerned that market conditions aren’t ideal for bond sales.
Oil prices have fallen more than 20% over the past month and a half, dropping most dramatically since the U.S. government exempted hundreds of thousands of barrels a day of Iranian crude from new American sanctions. Saudi Arabia is moving to prop up prices with a production cut, but uncertainty over how much it will cut and whether it will boost prices has clouded the outlook for oil traders and producers.
Meanwhile, internal divisions have also emerged as Aramco executives have been tussling with PIF over the price of Sabic, further complicating the deal. Any agreement below Sabic’s listed market price would inject less capital into the sovereign-wealth fund and likely force down Sabic’s listed shares, hurting minority shareholders. Sabic lists 25% of its shares on the Saudi Stock Exchange and has a market capitalization of roughly $100 billion.
Separately, another big loser if no deal emerges is Silicon Valley: after all Saudi Arabia has emerged as one of the biggest investors in US venture capital by way of its SoftBank relationship.
The Aramco acquisition of the Sabic stake was expected to infuse the Saudi sovereign wealth fund with billions of dollars to invest in technology companies and diversify the kingdom’s oil-dependent economy. Making matters even more complicated, PIF already has committed $65 billion to two outside funds—one for infrastructure investment managed by Blackstone Group LP and $45 billion for a technology fund led by SoftBank Group . It has also said it would develop new billion-dollar industries in tourism, entertainment and defense.
In other words, external Saudi Arabian sources of funding are rapidly drying out. First it was the $100 billion in proceeds that was expected to be the result of Aramco's IPO, and which money had been earmarked for the sovereign-wealth fund, but that process has since stalled in part because of the level of scrutiny a listing would have brought to Saudi Arabia’s state oil giant.
Now, the international bond market also appears to have been shut for Saudi Arabia, removing another $40 billion in "Plan B" proceeds.
If Riyadh indeed uses the leverage loan approach, its cash haul will likely be even smaller than that.
But the real question is: just what (audited) disclosure is Saudi Arabia so afraid of, and what does it mean for the financial well-being of the kingdom if it remains terrified to open its books to international investors even if it means losing out on billions in relatively easy proceeds, when it comes to the Saudi crown jewel - the Kingdom's vast - or perhaps not so vast - oil reserves?