The Kingdom of Saudi Arabia is in talks with banks for a loan of up to $10bn.
This will be the sovereign’s first loan in over a decade, since the country refinanced $4.5bn in a secret transaction in 1994, according to Dealogic.
This historic deal will be the first step in the economic reforms opening up the country to international capital markets.
The country’s Minister of State said this week that following the loan, there will be an international bond by September this year.
Banks participating in the sovereign loan would likely secure a fee paying role on the bond. But the highest prize on offer could be a coveted role in an IPO of the Kingdom’s oil enterprise, Saudi Aramco which could be the one of the largest IPOs ever.
These tempting treats stack up to look like the perfect deal for any bank.
But banks faced with high dollar funding costs and those who see the loan as a step in a highly politicised relationship with the sovereign will not be leaping forward to join Saudi’s loan.
One banker at a European institution said that the decision to join the loan and start a relationship with Saudi Arabia was too politicised.
“This one is a bit more marginal for us,” he said. “This is not like a deal for Mubadala, it’s more political.”
Abu Dhabi’s Mubadala is in the market with a $2bn loan refinancing right now. The sovereign wealth fund is a favourite of lending banks because of the wide range of ancillary business it offers.
Mubadala demands tight rates on its loans because it can — in 2013 the firm paid just 45bp for a three year dollar loan. For banks that can afford to lend at such low margins, lending to Mubadala really is a no-brainer.
And Saudi is expected to demand a tight margin on its loan. Bankers say the sovereign will price flat to or even lower than the 110bp margin which Qatar paid for its $5.5bn loan earlier this year.
The tight margin will exclude a large swathe of banks from participating in the deal, particularly those located in Saudi Arabia's neighbouring countries.
The fall in oil prices has reduced cash deposits for Middle Eastern banks and sharply increased their cost of dollar funding.
One loans head at a regional bank said that Middle Eastern lenders could not consider loans paying less than 250bp-300bp.
Equally, banks which have a cheap euro funding base could be reluctant to stump up a large dollar ticket for Saudi Arabia’s deal.
Middle Eastern borrowers have even been coming to the euro loan market to make the most of cheap euro deals.
On Tuesday, Qatar National Bank (rated Aa3/A+/AA-) launched a €1.5bn three year loan, the bank’s first ever euro loan for general corporate purposes.
In March, Aabar Investments signed a €3.6bn loan and paid a margin of about 150bp, according to bankers. The five year loan will be used to refinance and repay debt. Aabar had issued euro loans in the past but the latest deal was its largest.
If European banks can meet their Middle Eastern funding limits by lending to Middle Eastern borrowers in euros, it lessens the incentive to lend to the Gulf in dollars.
While Saudi remains very secretive about the details of its loan, banks will be grappling hard with the decision to commit to a loan, where the benefits, though substantial, are not to everyone’s taste.