DUBAI/LONDON (Reuters) - Saudi Aramco’s debut $12 billion bonds booked at best modest gains on Wednesday, their first trading day after some $100 billion in orders, suggesting part of the record-breaking demand was inflated, three banking and investment sources said.

FILE PHOTO: Logo of Saudi Aramco is seen at the 20th Middle East Oil & Gas Show and Conference (MOES 2017) in Manama, Bahrain, March 7, 2017. REUTERS/Hamad I Mohammed/File Photo

Aramco chose to only issue $12 billion of debt, as its focus was to obtain favorable pricing to set a benchmark for its future financing activities.

With almost $90 billion in demand left on the table, traders and fund managers expected the bonds to shoot up in value on Wednesday, but their performance was tepid.

“The price was a bit inflated as there was a lot of excitement and even hubris around this issue and I would imagine that some of the buyers may have flipped it in the market today,” said a London-based fund manager who looked at the deal but decided not to invest in it.

One trader and a senior banker said that, after realizing the deal would have been oversubscribed, investors boosted their orders to increase their chances to get a piece of the issuance.

Aramco’s longest-dated tranche, a $3 billion bond due in 2049, gained value in the secondary market, adding more than one cent on the dollar.

But some of the shorter-dated bonds were flat or even lower than where they priced on Tuesday, and lower than in pre-sale grey market trading.

The tranche with the shortest duration, a $1 billion bond due in 2022, was trading below the reoffer value at which it was sold on Tuesday, the trader said.

Speaking on condition of anonymity, he estimated that demand for Aramco’s bonds was inflated by 20-30 percent due to the expected oversubscription.

“We are seeing the truth of how much (of the demand) was fluff,” added a fund manager who participated in the deal.

EXPENSIVE BUT FAIR?

Still, Aramco’s issue was widely regarded as successful.

“Despite the usual padding, (demand) has definitely outstripped previous highs for emerging market borrowers,” said Angad Rajpal, head of fixed income at Emirates NBD Asset Management.

The 2046 and 2047 Saudi dollar bonds were down almost one cent - their biggest daily decline since early March, according to Tradeweb - suggesting some players switched their exposure from the sovereign to Aramco.

Aramco’s staggering finances - with core earnings of $224 billion last year and $86 billion in free cash flow at the end of 2018 - allowed it to target a combination of emerging markets and high-grade investors.

It started marketing the notes at levels very close to the yields offered by the Saudi government, which owns the company, but ended up offering around 20 basis points less. Some investors expect yields to gradually widen to match the sovereign rate.

“Aramco priced (the bonds) relatively expensive versus Saudi but quite attractive versus other major developed-market oil companies, and the potential to see 15-20 basis points spread tightening was too small at these levels,” said Sergey Dergachev, functional head of EM corporate debt at Union Investment.

“The price action has been fair.”

JPMorgan, Morgan Stanley, HSBC, Citi, Goldman Sachs and National Commercial Bank were the bonds’ bookrunners.

A group of 11 more banks including Bank of China, Deutsche Bank and Gulf International Bank worked on the deal as co-managers, a document issued by one of the banks leading the deal showed.

Bank fees for the bonds are unlikely to have topped around 1 basis point per bookrunner, said the sources. That would mean just over $1 million per bank.

“Fees should be minimal for such a giant bond amount and such a famous issuer,” said Lam Nguyen at Freeman Consulting. “I would estimate fees around 0.03 percent - 0.06 percent.”

The sources said the banks’ main interest in getting a role in the deal was to cement their relationship with Aramco ahead of future transactions.

Its initial public offering (IPO), due in 2021, is expected to generate $100 billion and to boost the Saudi Public Investment Fund - the main vehicle for Crown Prince Mohammed Bin Salman’s plan to diversify the economy away from oil.