KSA is taking its maiden green bond to market — but will there be investor appetite? Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), is moving forward with plans to issue its first green bond, with investment bankers apparently now on the phones to investors. But with issuance volumes in the region plunging this year on the back of market volatility, how will the bond be received by investors? Enterprise Climate spoke to EFG Hermes’ head of Macroeconomic Research Mohamed Abu Basha and Arqaam Capital’s Associate Director Noaman Khalid to get a sense of expectations.

There’s definite appetite in the market for MENA green bonds, illustrated by the success of Egypt’s sovereign issuance in 2020 and CIB’s corporate issuance the year after, Abu Basha tells Enterprise Climate. “Both went very well and they ended up issuing more than initially planned. I think the market would have welcomed further issuances,” says Abu Basha.

The market has changed a lot since then: Volatility in the global financial markets has the number of issuances in the region plunge in 2022. Sales were down 80% y-o-y in the first half of the year as issuers ⁠— including the PIF ⁠— held fire waiting for conditions to improve. “For most emerging and frontier economies, international markets are almost completely closed now. They cannot issue,” Abu Basha notes.

That hasn’t stopped everyone: Abu Dhabi Commercial Bank (ADCB) raised USD 500 mn in a green bond sale earlier this month — an issuance that was almost 4x oversubscribed, demonstrating strong investor demand. “That gives a bit of a hint on what to expect” of the PIF offering, Abu Basha says.

Saudi Arabia is well-positioned: With activity in the global bond market currently very limited, exposure to green bonds and other issuances is appealing, while Saudi Arabia’s strong economy — backed by high oil prices, increased economic diversification, and strong investment flows — will also play a big role in drawing investors, says Khalid.

Rating agencies like the PIF: The PIF’s issuance is likely to be a very high-rated bond, which will also be welcomed by the market, Abu Basha says. Rating agencies have assigned the fund investment-grade credit ratings, with Moody’s handing it an A1 and Fitch an A.

Expect plenty of interest outside our corner of the world: “I don’t think [appetite] will be limited to regional players. There will be quite a lot of interest on the international level,” says Abu Basha. The global rise of ESG funds — and even normal funds with mandatory ESG guidelines — will be one factor fueling this, he says. Investors will be looking to diversify their portfolios — both geographically and in terms of exposure to green issuances, says Khalid. For European and US investors in particular, “MENA will give them new exposure from a portfolio diversification point of view,” he adds. ACDB’s issuance drew over USD 1.9 bn in orders from a mix of regional and international investors, with strong demand from Europe.

Tightening financial conditions are unlikely to weigh on the sale: Even considering the impact of rising interest rates around the world, there’s likely to be high market interest — and available funding — for this kind of high-grade issuance, given there have been relatively few such issuances in a while, according to Abu Basha.

The eye of the storm: With interest rates expected to rise significantly before the end of the year and growing fears of a global recession, this could be good timing for the issuance, Khalid says.

What can we expect pricing on PIF’s bond to be like? Khalid expects the five-year bond to carry a yield of 5-5.2%. “If we assume another two or three rate hikes will take place, they could be factored into the pricing itself,” he said. The PIF’s slightly weaker credit rating means that the bond could be priced higher than the 115-bps spread priced for ADCB’s five-year bond, though higher coverage and volume could narrow this, Khalid adds.

Green finance is becoming a thing in MENA, Abu Basha tells us. Using green financial instruments allows GCC countries to lessen their reliance on hydrocarbons and keep investing renewables, he says. They’re another way for countries and businesses to raise money while allowing economies to diversify their funding sources: “KSA and PIF have a lot of equity and can invest [widely], but for sure they’d also like to entertain some debt financing — and this avenue can give them that.”

A FIRST LOOK AT ITS FINANCES-

The PIF has offered potential investors a look at its finances as it takes the bond to market, according to the Wall Street Journal, which got hold of a copy of the prospectus. The USD 606 bn sovereign wealth fund revealed that its total shareholder returns averaged 12% annually in the past five years, since Crown Prince Mohammed bin Salman took control of the fund in 2017. In the same period, “the total return on the S&P 500 index is roughly 60%, while the Saudi stock market index, where the PIF has the bulk of its portfolio, is up 52%,” the WSJ writes.

Other facts about PIF, drawn from the Journal story:

• The fund returned about 3% per year before MbS revamped it;
• PIF has assets under management of about USD 606 bn;
• 69% of assets are in Saudi and the GCC;
• It has created more than 500k jobs since MbS became involved;
• It has deployed USD 2 bn in capital in infrastructure, manufacturing, logistics and retail in a co-investment agreement with Russia’s SWF.