Debt finance is a fact of life for modern economies, as PIF has recognized
Suddenly, the senior echelons of the Saudi Arabian economy are in love with debt.
In a country that for most of its history lived off the considerable cash flow from oil, in the past couple of years the biggest entities in the Kingdom have changed their minds, and have either raised debt in international markets (like the government) or signaled their willingness to do so (like Saudi Aramco).
The latest member of Saudi Inc. to join the debt club looks like being the Public Investment Fund, the Kingdom’s pensions manager turned sovereign wealth fund.
Press reports that PIF was in the market for around $8 billion of loans via bank syndication were acknowledged by people familiar with PIF as being pretty well founded in truth, though nothing concrete has so far been finalized.
Not only are SWFs agents of economic change, they are also huge financial concerns in their own right
The idea of a cash-rich SWF looking for a loan might strike some as bizarre, but there is a logic and precedence to it. SWFs have changed from being simply a national bank account to be dipped into whenever an opportunity arose. Now, SWFs are regarded as agents of economic and social policy, with as much of a responsibility to help steer overall economic strategy as to turn a dollar in some exciting foreign investment, such as a football club or a swanky department store.
Not only are SWFs agents of economic change, they are also huge financial concerns in their own right. Total assets under management by global SWFs were estimated at $7.5 trillion this year, making them significant players in the world financial system. Increasingly, they are taking on many of the functions employed by banks and investment houses.
It is against this backdrop that PIF’s new-found attraction to debt should be seen. Its ambition is to become the biggest SWF in the world, with assets around the $2 trillion level, and to do this it will need serious banking relationships. The banks currently advising it and providing the syndication network for loans will become a core of friendly institutions along its rise to global eminence.
PIF, under managing director Yasir Al-Rumayyan, signaled about this time last year that it was contemplating the debts markets, and in New York in February Al-Rumayyan spelled out how debt would fit into the PIF mix.
It currently has assets declared at around $260 billion, with a target of reaching $400 billion within two years. It will not achieve this goal by relying on dividends paid by the equity investments it holds in Saudi Arabia.
PIF gets cash from the government of Saudi Arabia via capital injections, and will also receive the proceeds of sales of companies currently in its portfolio (though none have taken place yet.). Adding a third capital stream, in the form of borrowings, is a sensible and practical way of increasing its kitty.
Set against its targets, borrowing $8 billion from banks is not a transformational event. It is not entirely symbolic and $8 billion is big money in anybody’s language, but it will not on its own transform PIF. Rather, it is a straw in the wind showing how PIF is thinking.
Once the syndicated loan is out of the way, it would also be natural for PIF to look seriously at the global bond markets, as the Saudi government has done and as Saudi Aramco is contemplating doing. This would be a more significant move, both for PIF itself and for Saudi capital markets.
Although still at the early stages of its ambitious growth strategy, PIF also has some pressing financial requirements. It has pledged $45 billion to the Vision Fund managed by SoftBank of Japan; it is also on the hook for $20 billion promised to the big American investment group Blackstone and earmarked for US infrastructure.
It also has the costs that accompany global expansion. New offices are being opened in virtually all the world’s big financial centers, and senior executives for those hubs are being hired on big-ticket salaries. To become the best, you have to pay the best, PIF has decided
It can fund some of the commitments and outgoings by selling stakes in big Saudi Arabian companies, which is exactly what it is in talks to do with the $70 billion or so of equity it holds in Saudi Basic Industries Corp. (Sabic). But it could take months before a deal is clinched in talks with the potential buyer, Saudi Aramco. PIF would like to have a bank of capital at its disposal sooner rather than later.
Debt finance is an essential part of any modern financial system, and Saudi Arabia’s new willingness to take on debt is an indication that it is maturing as an economic entity. The demands of Vision 2030 will ensure that process continues.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai