Appetite for Saudi Arabia tested by latest jumbo loan

By Davide Barbuscia and Hadeel Al Sayegh

DUBAI (Reuters) - Saudi Arabia's Public Investment Fund (PIF) has attracted only tepid interest in plans for its latest multibillion-dollar debt sale, banking sources say, suggesting the kingdom is losing its appeal for some lenders.

International banks have flocked to join the efforts of the the Middle East's largest economy to reduce its reliance on oil and have continued to seek Saudi business despite Riyadh's relations with Western allies being tested by the murder last year of journalist Jamal Khashoggi.

The Saudi government has raised nearly $60 billion in global bonds since 2016, as well as a $16 billion international loan, with a string of state entities also joining the debt bonanza, including this year's $12 billion bond issue from oil giant Saudi Aramco.

Though banks have queued up for relatively low-earning Saudi sovereign bonds and loans in the expectation this would lead to more lucrative work, postponement of Aramco's planned stock market listing and a slow start to a slate of other planned privatizations have left some lenders disappointed.

"Banks had been made a lot of promises, on the equity side mostly, and what is happening is just sovereign borrowing," said one banker with an international lender.

Having raised $11 billion through a syndicated five-year loan last year, PIF is in talks with international banks for an expected $8 billion offering to be paid back within one year from the sale of the sovereign fund's 70% stake in petrochemicals company SABIC to Aramco.

"Banks already participated in the (PIF) term loan, so they're hesitant to also participate in the bridge loan if it's not at commercial terms and more about relationship lending," said another banker who is familiar with the matter.

Some large banks, such as HSBC and Citi, will participate, the sources said, meaning the deal is likely to get done. But the waning interest indicates that Saudi Arabia may have to start paying higher rates for sovereign debt that is not a precursor to more profitable work.

Last year sources said that PIF's $11 billion loan paid 75 basis points over the London Interbank Offered Rate (Libor), the same rate paid by the government itself.

A group of 15 lenders took part in that deal, including European, Asian and U.S. banks.

LOW MARGINS

PIF's new loan is also expected to offer relatively low margins, with one source saying he expected it to be around 30 basis points above Libor, adding to the lack of enthusiasm.

A PIF spokesman said the fund "does not comment on rumours or speculation regarding transactions".

He added that PIF's "long-term funding strategy includes four sources of finance, including capital injections and asset transfers by the government, retained investment returns and loans and debt instruments".

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Banks tend to establish or strengthen relationships with clients by providing relatively cheap financing in the hope of winning further business in areas such as trade finance or capital markets.

Saudi Arabia's economic reforms include privatizations, large infrastructure projects and the planned flotation of Aramco in a transaction expected to net $100 billion for the state and millions of dollars for arrangers.

However, Aramco's initial public offering has been postponed until 2021 and the other work expected has been slow to appear.

When Saudi Arabia started its borrowing spree, bankers said it was made clear in conversations that the government was asking them to lend cheaply in return for more profitable mandates further down the line.

Banks with large balance sheets and a strong presence in the Middle East, such as JPMorgan (NYSE:JPM) and HSBC, have been able to lend extensively at low margins but new borrowing requests from the Saudis are starting to fatigue medium-sized banks, the sources said.

"For some European banks, which have a very high cost of funding, this is a problem and they are feeling the pinch," one of the sources said.

The new PIF loan has also raised concern among potential lenders because it is unclear how the loan will be used because it is not tied to any specific investment or acquisition.

"There's no visibility in terms of deals and upcoming business," one of the sources said.