Saudi Aramco has changed its mind about a bond sale of about US$40 billion
that would have funded the bigger part of its planned acquisition of a
majority stake in local petrochemicals giant Sabic. The Wall Street Journal reports
that the oil major had been concerned about requirements for disclosure as
well as the volatility and uncertain outlook for oil prices, according to
unnamed sources familiar with the developments.
Aramco announced plans to acquire up to 70
percent of Sabic in a deal expected to be worth about US$70 billion. The
seller is the Saudi sovereign wealth find, the Private Investment Fund. The
deal would have expanded Aramco’s downstream business substantially, which
would have made it more attractive for potential investors if its initial
public offering ever took place, which senior officials recently said it
would.
Yet US$70 billion turned out to be too hefty a price even for the world’s
biggest oil company in terms of resources. Talk at the time surrounded
Aramco’s plan to use US$20 billion of its own cash and borrow the rest in a
combination of various large long-term loans and smaller short-term bridge
loans. The shorter-term loans could be replaced with bond issues after a year
or a year and a half, several sources told
Reuters last month.
Yet the public disclosure condition of international bond sales has made
Aramco think twice. As the WSJ reports, bond issuing requires disclosure of
three years of audited financial results as well as detailing any obstacles
that could affect the bond sale. Aramco, however, is notoriously opaque when
it comes to financial results and everything else. While its executives have
repeatedly made assurances that Aramco would start reporting its financial
results and disclose information about its operations ahead of the IPO, now
that this has been postponed until 2021 at least, the company seems to not
see any need to stick to its disclosure pledge. Related:
What’s Behind China’s Tightening Grip On Global Gold Markets?
Yet disclosure is not the only factor stopping Aramco from tapping
international bond markets. The company’s only asset is oil and oil has not
been doing so well in the past few weeks. In fact, over the past month, crude
oil benchmarks dived down so sharply they lost over a fifth of their value
over the four-week period. What must have additionally stung the oil industry
in general and Aramco in particular was the fact that virtually everyone
expected a price rise during that time as U.S. sanctions against Iran came
into effect. Instead, amid assurances, including from Saudi Arabia, that
there will be enough oil, prices went the other way.
There aren’t many options left for the acquisition of the 70 percent in
Sabic. As per a Reuters report from October, a leveraged buyout was also on
the table as Aramco discussed strategies with advisers JPMorgan and Morgan
Stanley. The other option is debt. And yet the lack of enthusiasm for bond
issuance is likely to have reverberations: opening up the Saudi bond market
was one facet of the sweeping economic reforms that Crown Prince Mohammed has
been pursuing over the last couple of years.
What’s more, Aramco’s unwillingness to disclose financial reports and
other information is unlikely to sit well with prospective investors, if we
assume the IPO is really still an option. This unwillingness, after all, was
one of the main factors that caused a rather lukewarm interest among
investors during Prince Mohammed’s roadshow the he undertook to promote the
IPO. Finally, the combination of unwillingness to disclose information and
the uncertainty surrounding oil prices, might make it harder to borrow. True,
this is Aramco we’re talking about and Aramco’s reputation means a lot for
bankers. Still, after the backlash Saudi Arabia received after the murder of
dissident Jamal Khashoggi—something unthinkable a few years ago—chances are
bankers might have become more cautious when approving loans.
By Irina Slav for Oilprice.com
