Saudi Arabia draws $67 billion demand for first international bond

By Davide Barbuscia and Sudip Roy

DUBAI/LONDON (Reuters) - Saudi Arabia attracted massive investor demand of about $67 billion on Wednesday for its first international bond offer, as the world's top crude exporter allayed concern about the impact of low oil prices on its finances.

A source familiar with the offer said order books had come close to the $69 billion record for an emerging markets bond issue that was set by Argentina in April this year.

Saudi Arabia is expected to raise up to $17.5 billion through its bond offer, which involves five-, 10- and 30-year tranches, the source said. Argentina set the current record for an emerging market sovereign bond sale in April, selling $16.5 billion.

The huge size of demand for Saudi debt was partly due to low global interest rates and funds' frustration with a lack of high-yielding assets around the world.

But Wednesday's debt sale also marked a success for Saudi Arabia in reassuring investors that it could stabilise state finances and reduce its dependence on oil. In the days before the sale, senior Saudi officials held a series of meetings with top investors in London and the United States.

Riyadh ran a record budget deficit of $98 billion last year - 15 percent of GDP - and is struggling to cut the gap this year. It turned to the international markets to finance part of its deficit this year, easing pressure on its foreign reserves, which it has been drawing down to pay its bills.

The Saudi issue is expected to set a benchmark for the kingdom and pave the way for further international issues by the government in coming years, as well as bond sales by a string of big Saudi companies.

Mohieddine Kronfol, chief investment officer for Middle East fixed income at major asset manager Franklin Templeton Investments, said the debut issue would invigorate Saudi financial markets.

"Not only could the bond help develop the Kingdom's debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for Gulf Cooperation Council fixed income as well as more global investors to take a closer, and longer-term, look at the region."

The five-year tranche was expected to be priced later on Wednesday at 140 basis points over U.S. Treasuries plus or minus 5 bps, the source said. That is cheaper than initial price thoughts of U.S. Treasuries plus 160 bps.

For the 10-year tranche, guidance tightened to 170 bps plus or minus 5 bps from a starting point of the plus 185 bp area. For the 30-year, Saudi Arabia set guidance at 215 bps plus or minus 5 bps; initial price thoughts were around 235 bps.

(Writing by Andrew Torchia; editing by Philippa Fletcher)