Saudi Aramco is set to launch its first public bond sale, of around $2bn, as soon as this month, as it begins to tap local currency debt markets as part of a $10bn fundraising programme.
People briefed on the company’s plans say the world’s largest energy company is expected to receive approval from Saudi Arabia’s capital markets authority this week to sell Islamic bonds, known as sukuk.
Sukuk are structured to provide investors with a fixed income stream while avoiding the Muslim prohibition against interest. Saudi Aramco has issued sukuk instruments directly before, but this is the first freely-tradeable sukuk approved by the local capital markets regulator
The state-owned oil company’s move to tap debt markets comes as it looks to raise funds ahead of its much-anticipated initial public offering, which is planned for 2018.
The SR7.5bn ($2bn) sharia-compliant bond sale would be the first tranche of a broader SR37.5bn debt programme, the people said.
The debt deal would follow Saudi Arabia’s $17.5bn sovereign bond last year, the largest in emerging markets history. It helped the government plug its fiscal deficit and set a benchmark for future issuance by government-related entities and the private sector.
Much of Saudi Aramco’s sukuk facility is expected to be privately placed among the lead arrangers on the deal, including HSBC Saudi Arabia, National Commercial Bank, Riyad Bank and Alinma Bank, the people said.
Saudi Aramco declined to comment.
The riyal issuance will be handled by locally-licensed banks, but further dollar-denominated bonds are also planned, potentially generating business for global lenders.
Saudi Aramco’s IPO is tipped to be the largest flotation of all time, even if it were valued at half the $2tn Saudi officials believe the company is worth.
The listing forms the centrepiece of a radical overhaul of the country’s economy, driven by the deputy crown prince Mohammed Bin Salman. He is aiming to create a sovereign wealth fund and reduce the kingdom’s dependence on hydrocarbons.
Gulf governments and state related entities have been forced to borrow from banks and tap debt markets to finance spending programmes as the oil-rich region copes with a sustained decline in crude prices.
As Saudi Aramco prepares to open itself up to investors at home and abroad, through the bond offering and the 2018 flotation, the kingdom and its largest revenue generator will need to embrace a greater level of transparency.
Senior Saudi Aramco executives have said investors will gain access to information about the company’s finances and reserves which have long been held a closely guarded secret.
While the deal is the first public bond sale by Saudi Aramco, the company’s joint ventures have previously tapped debt markets. Saudi Aramco has also previously issued sukuk to lenders as part of its regular financing arrangements with banks.
Saudi Arabian Total Refining and Petrochemical Company, a Jubail-based refinery with France’s Total, launched a debt sale in 2011. Sadara Chemical Company, a petrochemicals joint venture with Dow Chemical, sold another in 2013.
Additional reporting by Elaine Moore in London