RIYADH: Saudi Arabia raised $17.5 billion in its first international bond offering, HSBC said yesterday, reflecting strong interest as the kingdom seeks to diversify its oil-dependent economy. The bond issue-the first time Saudi Arabia has turned to international markets for financing-was hailed as historic by investors and according to official media was nearly four times oversubscribed.

"It was the biggest syndicated issue ever by any country," said Jean-Marc Mercier, co-director of the debt capital markets division at HSBC, which took part in the transaction and confirmed the figure.

The world's largest oil exporter, Saudi Arabia is seeking financing as it moves to diversify its economy following the global collapse in crude prices. The kingdom is projecting a budget deficit of $87 billion this year after a fall in oil revenues, which still account for most of its income.

It has taken a series of austerity measures, including subsidy cuts and reductions in cabinet ministers' salaries, and earlier this year announced an ambitious plan to diversify its economy. A veteran banker in the kingdom told AFP the issue would be considered a major achievement. "The rate came in at good levels. It's got to be viewed as a big success for the country," he said, speaking on condition of anonymity. Saudi Arabia divided the issue into three tranches with maturities of five, 10 and 30 years, HSBC said.

Future issues expected

The $5.5 billion in five-year bonds carries a coupon that pays annual interest of 2.375 percent. A further $5.5 billion in 10-year bonds carries a coupon of 3.25 percent, and the $6.5 billion in 30-year bonds has a coupon of 4.5 percent.

The effective annual interest rate is 2.588 percent on the five-year bonds, 3.407 percent on the 10-year bonds and 4.623 percent on the 30-year bonds. The official Saudi Press Agency reported that total subscription requests amounted to $67 billion, or almost four times the $17.5 billion offered.

Saudi Arabia had previously issued domestic bonds but that led to a tightening of bank liquidity, according to Patrick Dennis, lead Middle East economist at Oxford Economics in London. "That's the main reason why they're now borrowing overseas," he told AFP.

Saudi banks' loan-to-deposit ratio rose for the fifth consecutive month in August, reaching 90.8 percent, because of faster growth in credit relative to deposits, Riyadh's Jadwa Investment said in a report this month.

While bank stress may be a factor, the veteran banker in Saudi Arabia said an international bond sale fits with the kingdom's global outreach. "A lot of international investors don't like to buy the local currency," preferring US dollars, he said.

Borrowing abroad also reduces the drain on the kingdom's foreign reserves. Official figures show those reserves declined to $562 billion in August from $732 billion at the end of 2014.

London-based Capital Economics said in a briefing paper that Saudi reserves are now "unlikely to fall much beyond their current level in the coming years" because the bond issue will finance around a third of next year's budget deficit and almost all of the current account shortfall.

In April the kingdom released its wide-ranging Vision 2030 for diversifying the economy. At its heart is a plan to float less than five percent of state oil company Saudi Aramco on the stock market.

Proceeds would help form what will become the world's biggest state investment fund, with around $2 trillion in assets. The veteran banker said Saudi Arabia's first global bond sale is a "small start in the big picture" and is likely to be repeated.

Stocks jump

Saudi Arabia's stock market rose sharply yesterday as banks rallied after the kingdom's mammoth international bond sale, which could help to unclog liquidity bottlenecks in the economy. Egypt bounced as investors bought into recent dips. The Saudi index gained 2.3 percent in sharply higher turnover as all but one of the banks advanced, with Samba Financial, which earlier this week had reported a drop in third-quarter net income, jumping 5.2 percent.

The kingdom conducted the world's largest emerging market bond sale on Wednesday, selling $17.5 billion of debt in the government's first international offer while attracting investor orders totalling almost four times that amount.

"This issuance is a very welcome development for the Saudi equity market and the banking sector in particular," said Mohamed Eljamal, director of capital markets at Abu Dhabi's Waha Capital.

"One of the main issues facing the banking sector in Saudi is the tight liquidity in the system and the high loan-to-deposit ratio - this issuance should directly help relieve some of this liquidity pressure."

Finance Minister Ibrahim Alassaf said in a televised interview that state payments to construction firms would increase in the coming period and that delays in the payments were merely due to "technical reasons". Eljamal said this could soften the blow to bank earnings from souring construction sector loans.

Other stock market sectors were mainly driven by quarterly earnings announcements. Real estate developer Jabal Omar, which depends heavily on government projects, jumped 6.0 percent after posting a quarterly net profit of 691 million riyals ($184.3 million) compared to a loss of 127 million riyals a year ago.

Saudi Electricity jumped 5.9 percent after its third-quarter net profit rose 50.8 percent to 4.40 billion riyals; NCB Capital had forecast 1.90 billion riyals.

Saudi Telecom rose 2.3 percent to 54.75 riyals after reporting quarterly profit of 2.15 billion riyals, down 7.5 percent year-on-year but in line with forecasts. Alrajhi Capital said the results were "positive" and "STC continues to prove its resilience in the current tough market environment, an indication of the strength of its business compared to peers." It kept an "overweight" rating on the stock with a target of 70 riyals. - Agencies