Oil attacks push down bond values for Saudi Arabia and Aramco
Increased geopolitical risk and supply disruption had ‘credit negative’ effect on country and company financial profile.
Dollar-denominated bonds issued by both the government of Saudi Arabia and state oil company Saudi Aramco tumbled to multi-week lows on Monday after a weekend attack on Saudi Arabia’s oil facilities shut about five percent of global oil output.
Saudi Aramco’s longer-dated bonds bore the brunt of the decline, as the 2049 issue fell nearly three cents ($0.03) in early trading to its lowest since early August – before recovering some of the losses, data from Tradeweb showed.
Saudi sovereign bonds also came under pressure, with longer-dated issues falling one to two cents.
“Markets had become too sanguine over the last few months about the geopolitical risks facing countries allied with the US against Iran, with Saudi Arabia particularly vulnerable,” said Patrick Wacker at UOB Asset Management.
“While Saudi Arabia’s sovereign fundamentals are still firm, bond prices will need to factor in higher geopolitical risk going forward.”
The cost of insuring exposure to the government debt rose to a two-week high, with five-year credit default swaps (CDS) jumping by five basis points from Friday’s close to 65 basis points (0.65 percent), according to IHS Markit.
CDS contracts help buyers of sovereign or corporate debt to reduce potential loss arising from default by the bond issuer.
Ratings agency Moody’s said the attack was “credit negative” and the production disruption significant.
But it said it did not expect this to have a long-lasting effect on Saudi Aramco’s financial profile, citing the company’s robust balance sheet and strong liquidity buffers.
Saudi Aramco, the world’s largest oil company, made its bond market debut in April with a $12bn issue.
That followed the government’s 2016 debut, when it sold $17.5bn in a record emerging-market bond sale.
Credit ratings for both Saudi Arabia’s government and Aramco are in the “upper investment grade” bracket, making them popular among institutional investors such as insurance companies and pension funds that seek high-quality assets.
However, BlueBay Asset Management portfolio manager Kaspar Hense said he expected more downward pressure on the bond prices over the days to come.
“The budget situation in Saudi Arabia and the long-term perspective is not as bad any more as it was when the oil price went below $40 a barrel, so we think this is a rather short-term selloff,” Hense said.
On Monday, Saudi stocks gained 0.3 percent, with analysts pointing to support from state institutions as well as higher oil prices supporting firms.
Yet the gains only partly mitigated a one-percent drop on Sunday, with the index down 0.8 percent since the start of the year.
Blue-chip petrochemical giant Saudi Basic Industries Corp (SABIC) gained 0.9 percent after tumbling nearly three percent on Sunday.
‘Extent of the damage’
“The critical issues for Saudi Arabia and the global oil market are the extent of the damage and the time required to restore Aramco’s oil and gas supply,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Malik added that the short-term impact could be partially mitigated by the kingdom drawing down strategic oil reserves.
“We estimate that Saudi Arabia’s fiscal deficit could widen by some 0.9 percent to one percent of GDP [gross domestic product] under the scenario mentioned above, though oil revenue would see some support from the higher oil price as production and exports gradually normalise,” she said.
The International Monetary Fund estimates Saudi Arabia’s fiscal deficit may widen to 6.5 percent of GDP from 5.9 percent in 2018.
Higher government expenditure is likely to curb the upside of stronger non-oil economic growth. Investors have also been trying to gauge what impact the attack might have on Saudi Aramco’s long-awaited initial public offering (IPO), which was expected later this year and slated to be the largest in history.
Malik cautioned that a meaningful withdrawal of strategic reserves to make up for lost output or delay in restoring Saudi oil production could push back the timing of the stock market debut.
“The attacks could complicate Aramco’s IPO plans, given rising security risks and potential impact on its valuation,” Eurasia Group’s Ayham Kamel wrote in a note to clients.