{"id":74154,"date":"2022-09-29T01:59:32","date_gmt":"2022-09-29T01:59:32","guid":{"rendered":"https:\/\/enterpriseam.com\/climate\/2022\/09\/29\/what-kind-of-market-appetite-can-we-expect-for-ksas-maiden-green-bond-issuance\/"},"modified":"2022-09-29T01:59:32","modified_gmt":"2022-09-29T01:59:32","slug":"what-kind-of-market-appetite-can-we-expect-for-ksas-maiden-green-bond-issuance","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/climate\/2022\/09\/29\/what-kind-of-market-appetite-can-we-expect-for-ksas-maiden-green-bond-issuance\/","title":{"rendered":"What kind of market appetite can we expect for KSA\u2019s maiden green bond issuance?"},"content":{"rendered":"

<\/a> KSA is taking its maiden green bond to market \u2014 but will there be <\/strong>investor appetite?<\/strong> Saudi Arabia\u2019s sovereign wealth fund, the Public Investment Fund (PIF<\/a>), is moving forward with plans to issue its first green bond, with investment bankers apparently now on the phones to investors<\/a>. 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\u2019 head of Macroeconomic Research Mohamed Abu Basha<\/a> and Arqaam Capital\u2019s Associate Director Noaman Khalid<\/a> to get a sense of expectations.<\/p>\n

There\u2019s definite appetite in the market for MENA green bonds<\/strong>, illustrated by the success of Egypt\u2019s sovereign issuance in 2020<\/a> and CIB\u2019s corporate issuance<\/a> the year after, Abu Basha tells Enterprise Climate. \u201cBoth went very well and they ended up issuing more than initially planned. I think the market would have welcomed further issuances,\u201d says Abu Basha.<\/p>\n

The market has changed a lot since then:<\/strong> Volatility in the global financial markets has the number of issuances in the region plunge in 2022. Sales were down 80% y-o-y<\/a> in the first half of the year as issuers \u2060\u2014 including the PIF<\/a> \u2060\u2014 held fire waiting for conditions to improve. \u201cFor most emerging and frontier economies, international markets are almost completely closed now. They cannot issue,\u201d Abu Basha notes.<\/p>\n

That hasn\u2019t stopped everyone: <\/strong>Abu Dhabi Commercial Bank (ADCB) raised USD 500 mn<\/a> in a green bond sale earlier this month \u2014 an issuance that was almost 4x oversubscribed, demonstrating strong investor demand. \u201cThat gives a bit of a hint on what to expect\u201d of the PIF offering, Abu Basha says.<\/p>\n

Saudi Arabia is well-positioned: <\/strong>With activity in the global bond market currently very limited, exposure to green bonds and other issuances is appealing, while Saudi Arabia\u2019s strong economy \u2014 backed by high oil prices, increased economic diversification, and strong investment flows \u2014 will also play a big role in drawing investors, says Khalid.<\/p>\n

Rating agencies like the PIF:<\/strong> The PIF\u2019s 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\u2019s<\/a> handing it an A1 and Fitch<\/a> an A.<\/p>\n

Expect plenty of interest outside our corner of the world: <\/strong>\u201cI don\u2019t think [appetite] will be limited to regional players. There will be quite a lot of interest on the international level,\u201d says Abu Basha. The global rise of ESG funds \u2014 and even normal funds with mandatory ESG guidelines \u2014 will be one factor fueling this, he says. Investors will be looking to diversify their portfolios \u2014 both geographically and in terms of exposure to green issuances, says Khalid. For European and US investors in particular, \u201cMENA will give them new exposure from a portfolio diversification point of view,\u201d he adds. ACDB\u2019s issuance drew over USD 1.9 bn in orders from a mix of regional and international investors, with strong demand from Europe.<\/p>\n

Tightening financial conditions are unlikely to weigh on the sale: <\/strong>Even considering the impact of rising interest rates around the world, there\u2019s likely to be high market interest \u2014 and available funding \u2014 for this kind of high-grade issuance, given there have been relatively few such issuances in a while, according to Abu Basha.<\/p>\n

The eye of the storm: <\/strong>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.<\/p>\n

What can we expect pricing on PIF\u2019s bond to be like?<\/strong> Khalid expects the five-year bond to carry a yield of 5-5.2%. \u201cIf we assume another two or three rate hikes will take place, they could be factored into the pricing itself,\u201d he said. The PIF\u2019s slightly weaker credit rating means that the bond could be priced higher than the 115-bps spread priced for ADCB\u2019s five-year bond, though higher coverage and volume could narrow this, Khalid adds.<\/p>\n

Green finance is becoming a thing in MENA, <\/strong>Abu Basha tells us. Using green financial instruments allows GCC countries to lessen their reliance on hydrocarbons and keep investing renewables, he says. They\u2019re another way for countries and businesses to raise money while allowing economies to diversify their funding sources: \u201cKSA and PIF have a lot of equity and can invest [widely], but for sure they\u2019d also like to entertain some debt financing \u2014 and this avenue can give them that.\u201d<\/p>\n

A FIRST LOOK AT ITS FINANCES-<\/strong><\/p>\n

The PIF has offered potential investors a look at its finances as it takes the bond to <\/strong>market<\/strong>, according to the Wall Street Journal<\/a>, 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, \u201cthe 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%,\u201d the WSJ writes.<\/p>\n

Other facts about PIF<\/strong>, drawn from the Journal story:<\/p>\n