Saudi utility debt tops world peers on scarcity


Power generation capacity in the nation almost doubled in the 10 years to 2011 to 43,070MW. Pic: Bloomberg

Dubai: Saudi Electricity's Islamic debt has returned 50 per cent more than global peers since its debut almost nine months ago, boosted by the scarcity of corporate-bond investments in the region's biggest economy. The state-controlled utility's dollar-denominated 2022 notes have handed investors 10 per cent since their sale at the end of March, according to data compiled by Bloomberg. The Bank of America Merrill Lynch Global Utility Index returned 6.8 per cent over the same period.

Foreigners have limited avenues for exposure to the world's largest oil exporter, which is investing more than $500 billion to build infrastructure and industry, and create jobs. Saudi Arabia has 23 per cent less outstanding sovereign debt than neighbouring Qatar, whose economy is just over a quarter the size, according to data compiled by Bloomberg. Power generation capacity in the nation of 28 million people almost doubled in the 10 years to 2011 to 43,070 megawatts, according to Ministry of Water and Electricity data.

Lowest risk
Saudi Arabia, which holds $627 billion of net foreign assets at its central bank, saw its credit risk drop to the lowest in the Middle East this year. Five-year credit default swaps were at 72.8 basis points on December 14, down from a 2012 high of 151 in January, according to CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market.
The dearth of traded debt in the kingdom helped drive the yield on Saudi Electricity's 4.211 per cent bonds due April 2022 down 102 basis points, or 1.02 percentage points, since their March 29 sale to 3.19 per cent yesterday. The BofA global utilities index yields 2.76 per cent, a decline of 46 basis points in the same period, while the yield on HSBC/Nasdaq Dubai's US Dollar Sukuk Index fell 78 basis points to 2.83 per cent. By selling in dollars, Saudi Electricity's bonds have drawn investors as the price of Brent crude exceeds $100 a barrel for a second year. The Saudi economy is set to expand 5.1 per cent this year, the second-fastest pace in the Gulf Cooperation Council (GCC) after Qatar, according to the median forecast of 15 analysts compiled by Bloomberg.

More than 70 per cent of the kingdom's record issuance of Islamic bonds this year was denominated in riyals and many of these notes are held to maturity. Non-resident foreigners are only able to trade equities in the Arab world's largest bourse in Riyadh via share-swap transactions and exchange-traded funds. "The Saudi economy is booming, with fund managers having excess cash that needs to be deployed," Abdulwahid Mohammed Al- Matar, head of trading at Saudi Hollandi Bank, said on December 13. "For Saudi Electricity, a major part of its strength is the government ownership and support."

Risk factor

Still, the utility's notes are vulnerable to uncertainty over how it will settle outstanding debt, according to Commerzbank. Saudi Electricity owes 97 billion riyals ($26 billion), including 22 billion riyals to Saudi Aramco, Okaz newspaper reported on October 8, citing the General Auditing Bureau. The company has almost 26 billion riyals of outstanding bonds, according to data compiled by Bloomberg. A "risk factor is the uncertainty as to whether Saudi Electricity will have to ultimately settle in cash its large- size pending expenses linked to fuel purchases from Saudi Aramco," Apostolos Bantis, a credit analyst at Commerzbank in London, said by e-mail on December 13.

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