Sukuk sale could be followed by bigger international issue Bond sale would not necessarily mean end of IPO plans DUBAI: Reports that Saudi Aramco is to tap the international bond markets for the first time were met with the customary official tight lips from the company and its spokespeople, but from the reaction of “people familiar with the situation” it is at least an option being considered by the world’s biggest oil company in a fast-changing global environment for energy and finance. If the detail of the reports is true, Aramco will this week ask the Saudi Capital Markets Authority for approval for a $2 billion tranche of Islamic debt in the form of sukuk, to be followed soon after by an international bond issue of maybe four times that size. Aramco has raised debt on local markets before, as have various joint ventures in which it is a partmer, but this would be the first time this debt is traded, showing the increasingly sophistication of the Kingdom’s capital markets. Aramco is a prodigious cash generator, and is in excellent standing with the local and international banks which might normally be expected to provide, so why does it feel the need to go to the market now? Leaving aside the fact that the oil price is relatively high and nobody can say where it will be in a few months, the answer lies in the change of circumstance that has taken place at Aramco in recent weeks. Not so long ago, it was set to raise $100 billion by the end of this year in a global initial public offering of equity, and to hand over at least part of that to the Public Investment Fund, the Kingdom’s sovereign investor. Now — for a variety of reasons — that timetable has slipped. Advisers to Aramco have instead seen another way to achieve its own strategic objectives and those of the Vision 2030 plan to transform the economy: The purchase of a controlling stake in Saudi Basic Industries Corporation (SABIC). PIF owns 70 percent of the petrochemicals giant, and might be persuaded to accept some of Aramco’s privately held equity as the price for transfering its shares to Aramco. But PIF has financial needs of its own at the moment too, especially in funding its slice of ambitious investment plans in US infrastructure and in global technology. Put simply, PIF would rather have the readies. Even if the total raised comes to a chunky $10 billion, it would not pay for the minimum $50 billion cost of assuming control of SABIC, as Aramco has signaled it wants. So the banks will also be asked to advance some billions for the deal, while Aramco will probably also dip into its own considerable but undisclosed reserves. While a milestone in Aramco corporate history, a bond issue would not necessarily mean the end of the IPO plans. In fact, you could regard it as a prelude. Bond prospectuses should be almost as detailed and painstaking as those for IPOs, and potential bond investors will want information on the thorny issues of ownership and reserves, just as much as their equity counterparts. So it could be seen as a trial run for a big global stock market offering some way down the line.