Saudi Aramco is pushing for a top credit rating ahead of its first international bond sale, but Saudi Arabia’s sluggish economy may curb the state-owned oil firm’s ambitions.
Aramco intends to issue its first U.S. dollar-denominated bonds, expected to be at least US$10 billion, in the second quarter to help finance the acquisition of a stake in SABIC, the world’s fourth-largest petrochemicals maker.
Chief executive Amin Nasser said last week that Aramco was talking to credit rating agencies ahead of its debut on the international capital markets, which comes after it last year pulled what would have been the biggest ever stock flotation.
Credit ratings allow investors to compare and assess the credit quality of bond issuers and their debt securities and are important in determining how much borrowers have to pay.
As the world’s top oil producer, Aramco expects to match the ratings of Exxon and Shell, a source familiar with the matter told Reuters. Exxon is rated triple-A by agency Moody’s and AA+ by its rival S&P, putting it on par with the rating of the United States.
But this would put Aramco, which declined to comment, four to six “notches” above Saudi Arabia itself, creating an unprecedented gap between a state-owned firm and its government.
Bond market investors expect Aramco to have a similar, if not lower, rating than Saudi Arabia, meaning its bonds will have to offer a higher yield than government debt to attract buyers.
“We wouldn’t buy Aramco’s bonds if they were yielding lower than Saudi Arabia’s sovereign bonds of similar maturity,” Charles de Quinsonas, co-fund manager, M&G (Lux) Emerging Markets Income Opportunities Fund, said.
Moody’s and S&P declined to comment on Aramco, while a third agency Fitch did not respond to a request for comment.
SAUDI RATING
As a standalone business, Aramco could outweigh its international peers, but most of its assets are in Saudi Arabia and it is tightly linked to Saudi Arabia’s economic policies. And national oil companies are generally rated at the same level as or slightly lower than their governments.
Several investors said they expect Aramco’s rating to be in line with the country’s sovereign rating as a result, even though its full-year accounts for 2016, seen by Reuters, show that cashflow from operations put it well above Exxon, the world’s largest listed oil firm and Aramco’s nearest rival.
“We would anticipate that the group as a whole, at face value, would have a credit rating equivalent or slightly below that of the sovereign,” Ehsan Khoman, head of MENA research and strategy at MUFG, said.
Saudi Arabia is trying to diversify its revenues away from oil and stimulate a sluggish economy bruised by a price slump in the past few years. The Aramco IPO, which has been pushed back to 2021, was a cornerstone of its reform plans.
HIGHER YIELDS
When it comes to what Aramco will have to pay investors, the oil firm may have to offer higher yields than the government.
“One would expect Aramco, as an entity that is less core than the sovereign per se, to trade wider than sovereign bonds,” MUFG’s Mr. Khoman said.
While Aramco’s revenue stream depends on hydrocarbon sales, which are cyclical and subject to international supply-demand fundamentals, the state has access to more diversified wealth buffers to meet its contractual obligations.
Almost 70 per cent of state revenues are set to come from oil this year and Aramco is the sole holder of Saudi oil concessions and the country’s most important source of foreign currency.
“There is not a clear fundamental advantage (to buy Aramco, rather than Saudi bonds), but the spread concession to the sovereign could make it the more attractive investment when considering the relative credit risk profile,” Janelle Woodward, head of income at BMO Global Asset Management, said.
A spread differential of 20 to 30 basis points when comparing quasi-sovereign entities with their sovereigns was typical for highly-rated entities, Ms. Woodward said, adding that this would be the case with Aramco, which she expects will be rated at par with the kingdom.