Record-breaking demand a market vote of confidence for oil giant but some investors are worried about gov’t influence.

Orders for Saudi Aramco‘s debut international bond topped $100bn on Tuesday, a record-breaking vote of market confidence for the oil giant which has faced investor concerns about government influence over the company.

State-owned Aramco is expected to raise more than $10bn from the deal, which will be priced later on Tuesday and is seen as a gauge of potential investor interest in the Saudi company’s eventual initial public offering (IPO).

Before the six-part bond deal was marketed on Monday, Saudi Energy Minister Khalid al-Falih said initial indications of interest for the paper were over $30bn.

The demand appeared to be the largest ever for emerging markets bonds, fund managers said, surpassing order book value of more than $52bn for Qatar’s $12bn deal last year, $67bn for Saudi Arabia’s inaugural issue in 2016 and $69bn orders for Argentina’s $16.5bn trade that year.

“Purely on figures, it is a fantastic credit,” said Damien Buchet, CIO of the EM Total Return Strategy, Finisterre Capital.

But he added: “The thing is, they are part of Saudi Arabia, they are a government arm. For equity investors, this is always going to be an issue, more so than for bond investors.”

The Aramco bond has attracted interest from a wide range of investors, as the oil producer’s vast profits would put its debt rating – if unconstrained by its sovereign links – in the same league as independent oil majors like Exxon Mobil and Shell.

Aramco has insisted on its independence while meeting investors before the bond issue last week, saying the Saudi government remained committed to Aramco‘s governance framework to safeguard its independence even when oil prices dropped.

190126125553856

But for some investors, Riyadh’s control over the oil giant is an issue as its state ownership means decisions will ultimately be for the benefit of the government rather than investors.

“Aramco is more transparent, has stronger credit metrics and is on an improving ESG (environmental, social and governance) trajectory, whereas the government is more complex,” said Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA Fixed Income at Franklin Templeton Investments.

“The link between the two however is understandably very strong,” he said.

No premium

Previously reluctant to do so, Aramco last week opened for the first time its books to investor scrutiny, showing it is by far the most profitable company in the world.

Having made core earnings of $224bn last year and with $86bn in free cash flow at the end of 2018, Aramco does not need to borrow.

Initial indications of over $30bn in investor demand – before the bonds were actually sold – prompted Aramco to market the notes with almost no premium to Saudi government debt.

“They are clearly trying to price it (the bond) off existing AA corporates in this world, so people are looking at curves like Shell, Total, Exxon, but also technology giants like Apple,” said Buchet.

Aramco on Tuesday tightened initial price guidance by 15 basis points across the different bond maturities, meaning its bonds will yield less than Saudi Arabia, which owns it. This is rare, as state-owned entities generally offer higher returns than their governments.

{articleGUID}

“I think it’s madness that’s going inside the sovereign by a decent margin. Despite the fundamentals of Aramco, it’s ultimately sovereign risk,” said Richard Briggs, emerging markets strategist at London-based CreditSights.

The issue follows on the heels of Aramco‘s planned $69.1bn acquisition of a 70 percent stake in petrochemicals firm Saudi Basic Industries Corp (SABIC) from the Saudi sovereign wealth fund, a deal that many see as a transfer of government funds aimed at boosting the Saudi Crown Prince Mohammed bin Salman‘s economic agenda.

“This bond is being issued for two reasons: to establish Aramco‘s status as an independent corporate identity and to enable the transfer of wealth out of the company,” said Marcus Chenevix, analyst, MENA and global political research at TS Lombard.

Aramco, however, said the bond issue was not linked to the SABIC acquisition, which will be paid in tranches through internal cash flow and, potentially, other resources.

Many see the deal as a relationship-building exercise with international investors before its planned initial public offering, scheduled for last year and then postponed to 2021.

The bonds are divided into tranches of three, five, 10, 20 and 30 years. The offering also includes a three-year floating rate bond.

Aramco has hired Lazard as a financial adviser for the bond deal. JPMorgan, Morgan Stanley, HSBC, Citi, Goldman Sachs and National Commercial Bank have been chosen to arrange the bond issue.