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Saudi Arabia to test bond markets in first sale since Khashoggi murder

[BRUSSELS] Saudi Arabia sold US$7.5 billion of international bonds on Wednesday in the first test of how much damage the brutal killing of Washington Post columnist Jamal Khashoggi has inflicted on investor appetite.

Only three months have passed since global investors - along with some of the banks managing the deal - skipped a major economic forum in Riyadh amid broad condemnation over the murder, which some blame on Crown Prince Mohammed bin Salman. While early indications showed the kingdom would have to pay up, the premium narrowed substantially as the day went by.

"Saudi is not sanctioned, so I guess in the end for investors it's a question of price, set against perceived risks," said Tim Ash, a London-based strategist at BlueBay Asset Management LLC.

Reeling from the slump in oil prices, the kingdom has been relying on global bond investors to help finance its budget deficit, raising US$52 billion in sales since a 2016 debt debut. The initial outcry over Khashoggi's murder appeared at first as though it would stifle foreign investment into the country. The U.S. and Germany even said they'd rethink their arms sales.

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But since BNP Paribas SA, Citigroup Inc., HSBC Holdings Plc, JPMorgan Chase & Co. and NCB Capital Co. started marketing the bonds this morning, investors said it's more a matter of price than politics. While the offering on Wednesday will be the kingdom's smallest conventional one yet, it's still big.

"It was small by Saudi standards but big by last year's market absorption capacity," said Delphine Arrighi, a London-based emerging-market fund manager at Merian Global Investors.

One US$4 billion tranche, due in 2029, priced at 175 basis points over US Treasuries, down from initial guidance of about 200 basis points. The other, a US$3.5 billion sale of 31-year debt, saw pricing narrow to 230 basis points from around 250 basis points.

That's still about 25 basis points over Saudi Arabia's existing curve, which could be a sign that the kingdom was eager to ensure it attracted demand.

The bond sale, the same day that Turkey also sold sovereign debt, comes amid renewed appetite for riskier assets on speculation the US Federal Reserve will pause interest-rate increases this year. It also comes weeks before JPMorgan begins including bonds from Saudi Arabia in its emerging-market bond indexes.

"The Khashoggi case hasn't prevented investors from buying bonds in the secondary market so I doubt it will be a big factor in preventing investors coming back into Saudi Arabia now that the bonds will be eligible for inclusion in the JPMorgan indices," said Anders Faergemann, a fund manager at PineBridge Investments in London which oversees US$90 billion in assets.

The kingdom's bonds took a beating after Khashoggi, a Saudi exile who wrote critically about Prince Mohammed's regime, was killed at the nation's consulate in Istanbul in October.

The murder and oil's slump into a bear market in the fourth quarter battered Saudi Arabia's securities, making them among the worst performers in the Gulf Cooperation Council.

Finance Minister Mohammed Al-Jadaan said last month the nation intends to sell about 120 billion riyals (S$43.3 billion) of local and foreign-currency debt this year to help finance its deficit. Prince Mohammed, meanwhile, has made finding the Khashoggi's killer a priority.

Last week, 11 suspects were put on trial for his alleged murder, with the government denying the prince's involvement.

"The timing of the transaction makes total sense," said Mohammed Elmi, an emerging-market portfolio manager at Federated Investors UK in London. "EM has had a strong start to the year and the Saudis want to take advantage of the tighter spreads to issue into."