Saudi Arabia raises $12.5bn from dollar bond sale to bolster budget

Saudi Arabia is raising $12.5 billion from its second dollar bond sale this year as the kingdom taps debt markets to bolster its finances amid an economic overhaul.

The government sold $3 billion of the long five-year notes at 110 basis points over Treasuries and $5 billion of the 10-year tranche at 145 basis points, people familiar with the matter said, declining to be identified because the information is private. It also raised $4.5 billion from the 30-year tranche at 180 basis points. Investors submitted about $40 billion in bids, they said.

The world’s biggest oil exporter is returning to the dollar-bond market for the second time this year as investment-grade borrowing costs relative to U.S. Treasuries remain historically cheap. The kingdom raised $9 billion from the sale of five- and 10-year Islamic bonds in April to help bridge a budget deficit, forecast at 198 billion riyals ($53 billion) this year, or 7.7 percent of economic output. It also raised 37 billion riyals in the past three months from domestic debt sales.

Saudi Arabia is implementing a transformation plan aimed at weaning the economy off oil. As part of these efforts, the government plans to create the world’s largest sovereign fund and sell hundreds of state assets, including Saudi Arabian Oil Co. as well as stakes in the stock exchange, football clubs and flour mills.

The kingdom Tuesday said it will allow women to drive cars, the most dramatic move so far in the government’s bid to open up the conservative Saudi society and one that is likely to be welcomed by overseas investors. Last week, its sovereign wealth fund said it is setting up a $2.7 billion company to invest in entertainment in a country where conservatives oppose music and religious police enforce gender segregation.

“Whatever moves the government takes toward modernization and reform will be welcomed by foreign investors,” Richard Segal, a London-based credit analyst at Manulife Asset Management, said by email. “It will certainly help, but I’d think equity and direct investors would find this more relevant, as it shouldn’t have a significant bearing on credit risk.”

Saudi Arabia is rated A1, the fifth highest investment grade at Moody’s Investor Services. GIB Capital, Goldman Sachs Group Inc., HSBC Holdings Plc, and JPMorgan Chase & Co. are lead managers on the sale.