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Saudi Capital Markets: Appetite and Ability to Finance New Investment Initiatives Brad Bourland Chief Economist Novemb

Saudi Capital Markets: Appetite and Ability to Finance New Investment Initiatives Brad Bourland Chief Economist November 15, 2000. GDP and Development of Capital Markets. Subsistence economy 30 years ago. Early capital market: informal private placement of equity.

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Saudi Capital Markets: Appetite and Ability to Finance New Investment Initiatives Brad Bourland Chief Economist Novemb

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  1. Saudi Capital Markets: Appetite and Ability to Finance New Investment Initiatives Brad Bourland Chief Economist November 15, 2000

  2. GDP and Development of Capital Markets • Subsistence economy 30 years ago. • Early capital market: informal private placement of equity. • Role of banks: Short-term lending for working capital. • No corporate paper market. Just now developing. • No need for stock market to raise capital.

  3. Overall Financing Patterns • Financing new businesses/projects has been relatively simple • Typical 25-30% equity, 70-75% financing • The 30 % equity: • Privately and informally raised • The 70% financing: • Obtain as much SIDF financing as possible (industrial ventures) • Banks finance the rest, either with short term loans or, more recently, with local/international syndications • Very good pricing available for the bank loans • “In all my years I have not heard of a project that failed here because it could not raise financing.” An experienced Saudi banker.

  4. Financing with Private Equity • Oil wealth of the 1970s created ample private wealth, which has been the main source of financing new companies. • Estimates of hundreds of billions of dollars of Saudi private wealth abroad, which is often repatriated to finance new businesses. • No well-organized venture capital industry. • The model remains that foreign investors bring equity, technology, and know-how, Saudi investors bring equity and local market knowledge. • Even the government has been a player through PIF and GOSI.

  5. Financing with Public Equity: Saudi Stock Market • Not used recently for raising new capital--no IPO activity. • But a sophisticated platform. • Market Cap: $60 billion. • Daily volumes 2-4 million shares. • 74 companies traded • No trading floor. Banks have share dealing rooms. • Market opened November 1999 to foreign investors through mutual funds. Previously only through SAIF (Samba fund).

  6. Financing with Debt: SIDF • Saudi Industrial Development Fund: Government fund established to encourage investment in local industrial projects. • General funding structure: • 25 % equity • 50 % SIDF • 25 % bank debt • Available since April 2000 to 100 % foreign-owned projects. • Typically SAR 2 billion in new lending per year. Outstanding total loans of SAR 10.3 billion. • Terms: SAR 400 million cap, several year grace period. • All-in costs: 1-3 % per annum (up-front fee plus annual management fee).

  7. Financing with Debt: Syndicated Loans Market • High Degree of Bank Appetite/Liquidity • $500+ million local capacity for well-structured deals with strong obligors • Balance above $500 million met from regional and international banks • Infrastructure and petrochemical bias in past deals • Market Depth • $8.7 billion in syndicated deals closed in 1998-1999 • 7-10 active players in the primary debt market • Relatively deep secondary market--15-20 active local and foreign banks (Gulf, European, Japanese) • Market Flexibility • US $ denominated • Tenors up to 9 years clean, 13 years Export Credit Agency-backed • Historically limited ECA involvement (disclosure constraints, pricing vs tenor tradeoffs, liquid local market) • Potentially strong appetite for project finance deals (with sound business proposition, quality sponsor, air-tight structures).

  8. Syndicated Loan Experience Value and Number of Deals

  9. Bond Markets • Government Bonds • Primary market only. Saudi Government bonds are offered directly to the banks on a monthly basis in maturities of 2, 5 and 10 years • Pricing is based on 1 year Saudi Riyal money market rate as the benchmark, with 10 bps premium per annum added for every additional year to maturity • Current pricing methodology results in deviation in the Saudi yield curve vs. US $ yield curve. Changes possible. • Corporate Bonds • None yet. A “guaranteed corporate obligation” recently begun by Samba. • Limited role for ratings agencies (S&P, Moody’s, etc) because of limited bond market, and ability of government and top local companies to borrow at low prices without ratings. • No bond market to disintermediate the banks as lenders.

  10. The Banking System • Ten Banks, 1,200 branches, 2,026 ATMs, 17,300 POS terminals • High quality Central Bank (“SAMA”) • Still high use of short term borrowing by companies. • Banks eager to increase the amount of long-term borrowing by companies. * 1998 numbers for bank financial data

  11. Role of the Banks: Sophisticated Money Markets • Foreign Exchange • Fixed Rate Regime with FX Parity against US Dollar at 3.75 • Last devaluation in 1986 • No changes expected in the FX regime • Money Markets (up to 3 months) • Short term interest rates move with U.S. Dollar rates (Fed Funds) • Marginal deviation from Fed Funds (15 to 25 bps) in short term interest rates to accommodate for local factors • No changes expected in the current system • FX Swap Market (3 months to 1 year) • Serves as a primary benchmark for money market yield curve up to one year • Very liquid market with low spreads • SAMA participates to control volatility, large deviations from U.S. money market curve • No changes expected in the current system

  12. Treasury Products in the Saudi Market Treasury Products Tenor Average Ticket Market Bid/Offer Spread Large Tickets Traded (US$ Millions) (US$ Millions) Deposits O/N to 3 months 50 300 1/8 % > 3 months - 2 years 25 100 1/8 % Loans 1 - 3 months 50 200 Sibor Based >3 months -5 years (Fixed Rate) 25 100 SAR IRS (8 - 20bps) FX Spot 50 200 2 Pips FX Forwards Up to 1 year 50 200 1/32 % - 1/16 % > 1 year - 2 years 25 100 1/8 % Forward Rate Agreements Up to 1 year 50 200 2 to 5 bps Interest Rate Swaps Upto 1 year 50 150 3 to 8 bps > 1 year - 5 years 25 100 8 to 20 bps FX Options Up to 1 year 50 250 1/8 % Repos/Reverse Repos against Govt. Sec. Up to 2 years 50 100 1/8 % Debt Securities: Commercial Papers (SAMBA Guaranteed) 3 months 15 25 Sibor Based (1/8 %) 1 - 5 years 25 150 1/8 % Secondary Market T. Bonds

  13. Money Market History USD Vs. SAR (3 month rates) USD Vs. SAR (1 year rates)

  14. Patterns in Local Transactions SAR bn

  15. Conclusions • Ample liquidity exists to finance foreign investors at reasonable rates. • The capital markets will continue to deepen gradually--stock market, corporate paper market, long-term lending. • The banks offer sophisticated products for managing day-to-day interest rate risk and foreign exchange risk. • An overall business environment of low volatility in interest rates and foreign exchange, along with a low inflation and moderate tax environment, make the financial operating conditions attractive for foreign investors.

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