Saudi's first $15 billion bond sale would be sweeter if OPEC strikes a deal

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Saudi Arabia needs the bond money to diversify: Economist

Saudi Arabia is courting investors for what could be a whopping $15 billion-plus bond deal. It's a massive offering that's likely to see good demand, and possibly more so if OPEC and global oil producers strike a deal that would stabilize oil prices.

The offering is an important step forward for the country, which has big plans to make over its economy and diversify away from its dependence on crude revenue. The debt offering also comes at a time when Saudi needs to shore up its finances. The kingdom has been hit hard by the long period of low oil prices and the costly war in Yemen. With about three-quarters of its revenues coming from petroleum, Saudi Arabia has been running high deficits — $100 billion last year alone as oil prices plummeted 30 percent.

The debt offering will be the kingdom's first international bond issuance, and it should become the clear sovereign benchmark, allowing for broader development of debt capital markets in the country, according to Standard and Poor's.

"There is a fair amount of demand for Middle Eastern debt," said Adrian Helfert, head of global fixed income at Amundi Smith Breeden. "You are getting a little bit of a premium for the oil downtrend and instability, and you should also get some compensation in that this is a maiden voyage for this issuer, and they want to ensure they have open market access."

The deal is estimated at anywhere from $10 billion to $20 billion, a huge offering to bring to the multi-trillion-dollar emerging market debt market.

Following offerings from Qatar and Abu Dhabi, the Saudi bonds are expected to be easily placed. Qatar in May issued $9 billion in debt, double the amount it initially planned to sell. At the time, Qatar's 5-year was priced to yield 120 basis points over the U.S. 5-year Treasury note, and it was yielding about 2.3 percent on Thursday.

Saudi Arabia is holding a call to discuss the bonds with U.S. investors on Monday. The kingdom is telling investors that it is targeting a balanced budget by 2020, and expects that if oil prices stay in the current range, it could reach that target. A road show for the deal has been underway this past week.