Mega loans have been relatively thin on the ground in Saudi Arabia in recent years. To that extent, Saudi Aramco’s signing of a $10bn standby revolving credit facility with a group of 27 local and foreign banks on 30 March was inevitably seized on as a potential signifier of a trend in which more Saudi corporates would take advantage of historically low borrowing costs to raise financing at preferential terms.

Aramco’s loan was partly designed to refinance existing debt. The $10bn credit agreement – denominated in a mix of dollars and riyals – is intended as a standby loan, giving the state oil company access to a pot of funds whenever needed. Eight Saudi lenders participated in the local currency facilities, among them National Commercial Bank and Riyad Bank.

Borrowing costs

The most interesting aspect of the refinancing for many was the extremely low pricing that Aramco obtained. One $6bn five-year component of the loan pays an interest rate of just 12 basis points. A remaining $1bn one-year facility pays 10 basis points, while a $3bn, riyal-denominated, sharia-compliant murabaha carries a profit rate of just 11 basis points and 9 basis points, for the same five-year and one-year options as with the conventional tranche.

Aramco was not alone among Gulf oil companies seeking to exploit the low borrowing costs, and both Kuwaiti and UAE state oil companies have been tapping the loan market as they weigh up acquisition programmes.

It is not hard to see why. When Aramco sealed the $10bn facility in March, it was at rates several basis points lower than its previous 2010 loan facilities. That spells a significant result for the state energy giant.  The company was predictably bullish, announcing in a statement that the pricing “sets a benchmark in the kingdom and the region and reflects the banking community’s continuing confidence in Saudi Aramco and Saudi Arabia”.

Aramco is widely viewed as a quasi-sovereign and the facility was a revolving facility unlikely to be drawn very much”

Riyadh-based corporate banker

But Saudi-based bankers warn against viewing the $10bn Aramco facility as setting any kind of realistic template in terms of borrowing costs. That deal, says one Riyadh-based corporate banker, was a distinct one-off. “Aramco is not a benchmark for other corporate financings in Saudi Arabia. The truth is it is widely viewed as a quasi-sovereign and the facility was a revolving facility unlikely to be drawn very much – it’s mostly standby,” he says.

Even so, interest rates are at historical lows, so now should be a good time to secure financing. The three-month Saudi interbank offered rate (Sibor), used as a benchmark for some loans, hit a near four-year low on 12 April, reaching 0.77125. In March as whole, the Sibor averaged 0.7753, down significantly from 0.9516 in March 2014. These low costs mirror the three-month London interbank offered rate (Libor), which in mid-April was some 15 basis points below the average rate seen in 2012.

Liquidity among Saudi banks is high, and with the loan-to-deposit ratio below the 80 mark, that should in principle make them more willing to lend. Bankers note, however, that ‘cheap’ is a relative term in the Saudi context.

Margin pricing

There is, for example, a difference in margin pricing between dollar and riyal commitments, with nominally at least, local currency being cheaper. “With Saudi banks, the dollar facilities are higher on the margins, but if you look at the underlying interbank rate, the all-in cost to the borrower ends up being the same or even slightly cheaper in dollars. The margins vary to reflect the funding price risk on the dollar side,” says the banker.

This is a legacy of the 2009 period, and that concern has remained with many Saudi bank treasuries. Corporate appetite for tapping cheap borrowing is also not necessarily translating into a flood of deals hitting the market.

Rather, it is the heavyweight likes of Aramco – with their sovereign characteristics – that are dominating deal flow. In mid-March, Aramco closed the $8.1bn project financing for the Rabigh phase 2 petrochemicals project, a facility that includes dollar and riyal tranches (with a $935m sharia-compliant tranche). Another Rabigh-based project sponsor, Rabigh Arabian Water & Electricity Company, reached financial close that month on a $776m facility to fund the expansion of an independent power and water project.