Saudi Arabia's sovereign wealth fund, the Public Investment Fund, has shone a rare and intensely bright light with its debut $3bn debut bond last week amid the gloom in global fixed income markets, and especially the EM primary bond markets.
PIF's spectacular transaction, a green deal that included a $500m 100 year tranche, made the global debt markets sit up and take notice. A first-time green transaction weighing in at $3bn is an unusual occurrence, especially from a country whose economy, up until now at least, has been almost entirely based on hydrocarbons.
But PIF has put in place a green financing framework, as well as securing a second party opinion from DNV, which appears to have persuaded the international investment community — despite Saudi Arabia continuing to earn vast sums of money from oil production — that its plans are credible. Some 250 investors joined the deal.
The framework outlines what the money from green bonds can be spent on — renewable energy, energy efficiency, sustainable water management, pollution control, green buildings, sustainable resource management and clean transport. It also details what it cannot be spent on — coal or gas power generation, new oil and gas exploration and development, coal mining, transporting fossil fuels, nuclear generation, military activity or industrial agriculture.
Some of the projects will be funded by PIF. As one debt capital markets banker who worked on the transaction said: “This is the transition vehicle away from an oil economy to a non-oil economy.”
But what astounded market participants across the world was the $500m 100 year piece. At a time when even developed market sovereigns are thinking twice about issuing anything over 10 years because of the increasingly high costs that investors are demanding of such maturities, bagging a century bond was deemed extraordinary.
Gold plated
For some onlookers, the 100 year tranche was a classic case of a Saudi borrower buoyed by the high oil price showing off. One said it was "the primary debt market's equivalent of the gold-plated Lamborghinis that drive around central London during the summer months. Really ostentatious, a bit noisy but quite interesting to look at.”
Century bonds are rare in emerging markets. China, Argentina, Mexico and Israel have issued 100 year bonds, which are often seen as trophy transactions done for the bragging rights, rather than for any particular funding need or efficiency they have achieved for the issuer.
But in PIF’s eyes, there were practical purposes for the 100 year note. It wanted to show that Saudi Arabia had a multi-decade plan to invest in green assets, and to begin building a full yield curve.
As a senior debt capital markets banker who worked closely on the transaction said, the costs associated with doing a longer deal were outweighed by the message that such a maturity sent. “What the Saudis really do not like is the EM tag,” he said.