Saudi wealth fund braves market tumult in green bonds debut, others unlikely to rush

DUBAI – Saudi Arabia’s Public Investment Fund faced little scrutiny over its green credentials when it sold $3 billion in green bonds last week in its maiden debt issue, according to people familiar with the transaction.

While the region’s other issuers remain wary of market volatility, the sale – the first green bond issue by any sovereign wealth fund – went smoothly with little pushback from investors over the environmental, social and governance (ESG) credentials, two bankers told Reuters. One noted that an investor call they attended only raised one concern, but did not elaborate.

Final orders totalled around $25 billion and the fund received requests from interested investors for a 100-year tranche, said Abdeslam Alaoui, Deutsche Bank’s capital markets head for the region and one of the deal’s leads.

He said that PIF’s issuance of the first-ever 100-year green bonds showed investor confidence in its credit strength and Saudi Arabia’s long-term commitment to energy transition. The world’s top oil exporter last year pledged carbon neutrality by 2060.

PIF paid a new issuance premium of 65 basis points over the sovereign on five- and 10-year tranches that raised $1.25 billion each. They priced roughly 10 basis points below oil giant Saudi Aramco’s yield curve.

PIF sold $500 million of the 100-year bonds – the first bonds of that tenor from a debut issuer or a sovereign wealth fund, and the first 100-year issue in the region.

“PIF has scored many firsts with this transaction and sent a very strong signal in what is a very challenging market environment,” Alaoui said.

The 100-year bonds were trading up 4 cents on the dollar in the grey market, while the other tranches were flat or marginally below issue prices, fixed income analysts said on Tuesday.

The bonds saw the highest placement in Britain, followed by the Middle East and North Africa, then U.S. offshore investors, Europe and Asia, according to a bank document seen by Reuters.

U.S. onshore investors could not participate because PIF has two years of financial statements and needs three to issue in onshore in the United States.

Alaoui said the fund was expected to continue issuing green bonds, including green sukuk, or Islamic bonds, and to tap the onshore U.S. market in the coming years.

Investor demand for ESG-linked financing has surged and interest has picked up in the Gulf and wider Middle East, but concerns remain over allocating ESG funds to a region still heavily reliant on hydrocarbon revenue and with a poor human rights record.

Some ESG watchers criticised the deal, taking aim at PIF’s 4 s-percent take in Aramco, acquired in February.

“I think the investors’ focus on PIF issuing a green bond is overdone. They have green investments, and there’s a clear trajectory to continue such investments,” said Zeina Rizk, executive fixed income director at Arqaam Capital, which invested in the bonds.

PIF has $10 billion of eligible green investments through 2026, its investor presentation showed. The fund pledged to invest roughly $40 billion in Saudi Arabia through 2025.

Egypt, due to host the COP27 climate conference next month, became the region’s first issuer of sovereign green bonds in 2020. Several other sovereigns and state-linked entities in the region are exploring – or in the process of setting up – their own green frameworks to eventually raise green debt.

First Abu Dhabi Bank, which taps the market regularly and is one of the region’s most active green issuer, followed up PIF’s transaction a day later with a sale of $700 million worth of green bonds.

Three bankers said that in general they saw a limited near-term pipeline as issuers continue to adjust to rising interest rates as central banks led by the U.S. Federal Reserve fight to tame decades-high inflation.