Bond investor euphoria was rampant yesterday, with virtually everyone rushing to get an allocation in the historic (if perplexing) $12 billion Aramco debt sale, which ended the day with a record orderbook of over $100 billion, roughly 10x oversubscribed, and the highest ever for any bond offering even surpassing Verizon's 2013 historic bond sale. Or so the underwriters claimed.
In reality, when the Aramco $12 billion bonds broke for trading, they posted very modest gains on Wednesday, suggesting that the $100 billion in orders were mostly vapor and that "the record-breaking demand was inflated" according to three banking and investment sources quoted by Reuters.
While only $12 billion of the $100 billion orderbook was allocated, nearly $90 billion in demand was left on the table, traders and fund managers expected the bonds to shoot up in value on Wednesday, but the first day of trading was a total dud:
“The price was a bit inflated as there was a lot of excitement and even hubris around this issue and I would imagine that some of the buyers may have flipped it in the market today,” said a London-based fund manager who looked at the deal but decided not to invest in it.
Another trader said that after realizing the deal would have been oversubscribed, investors boosted their orders to increase their chances to get a piece of the issuance.
Actually, what the trader meant is that he was confident he would be able to make a tidy profit by flipping the bond he was allocated after just one day; when that turned out wasn't going to happen, he was rather angry.
While the bonds did rise modestly in early trading, Aramco’s longest-dated tranche, the $3 billion bond due in 2049, eventually faded and was last trading at 99.3 cents on the dollar, just barely above the break price of 98.553.
Worse, some of the shorter-dated bonds were flat or even lower than where they priced on Tuesday, and lower than in pre-sale grey market trading. And the punchline: the shortest duration tranche, a $1 billion bond due in 2022, was trading below the reoffer value at which it was sold on Tuesday, the trader said, who told Reuters that he "estimated that demand for Aramco’s bonds was inflated by 20-30% due to the expected oversubscription."
“We are seeing the truth of how much (of the demand) was fluff,” added a fund manager who participated in the deal.
And if you can't trust the bond's lead underwriter, JPMorgan, whose CEO just a few months ago decided to boycott a Saudi summit to "virtue signal" after the Khashoggi murder, only to end up handing Crown Prince bin Salman a check for $12 billion, well who can you trust?