This month’s bond sale by Saudi Arabia’s oil firm Aramco has taken the investing world by storm.
However, you shouldn’t buy into the hype. That’s because when you look beyond the headlines, the real reason for the sale is not as it may first seem, according to a recent report.
The state-owned oil giant sold $12 billion of bonds earlier this month and was so oversubscribed that it managed to get the deal done at borrowing costs that were better than the country that owns it — Saudi Arabia. That’s a rare event anywhere in the world as most companies pay more than do their governments.
Cause for pause?
It sounds great. But the ulterior motives may give investors cause for pause.
“The purpose of the imminent Aramco bond issues is to facilitate extraction of cash from the company and into MBS’s [ruling Crown Prince Mohammed bin Salman] pet projects,” states a recent report from London-based financial firm TS Lombard.
MBS is trying to reform the Saudi economy from one that relies heavily on oil into a mixed economy less reliant on sales of energy. To do that, the country needs access to more cash, and Aramco has become the financial vehicle through which to get the funds, Lombard says. That’s led to the massive bond deal earlier this month.
The sale of the $12 billion corporate bond offering, which is extraordinarily large by any standards, serves two purposes.
First, it will “establish Aramco’s status as an independent corporate identity,” states the Lombard report.
If the company looks independent, then investors will likely be more attracted to it.
That then allows the Saudi government to get access to the much-needed funds required to modernize its economy. The report explains the thinking as follows:
The government wants Aramco to appear independent in order to list the company as an asset – whether to borrow against it, to define it as a sovereign wealth asset or even to sell shares in the future.
In other words, the bond sale is to gain future access to even more cash than the $12 billion extracted.
What supports that idea is that Aramco makes oodles of cash already and doesn’t need money, in the same way, as say a startup company might. Again the Lombard report explains:
As the prospectus shows, Saudi Aramco makes more profit than any other single company in the world. Moreover, the company keeps an enormous amount of cash on its books, about $48 billion if the consolidated balance sheet numbers in the prospectus are to be believed.
Don’t think that the recent bond deal will usher in a period of robust western-style corporate governance, either.
The Saudi government has no interest in real change at the oil company or in the relationship between the firm and the government.
“It is not interested for example in having to negotiate with a board of directors,” states the Lombard report.
Put simply, Saudi’s leaders want it both ways, and that should leave investors feeling a tad uneasy.
Simon Constable is a writer, economics commentator, and a fellow at The Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise.
By Simon Constable
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