June 18, 2019 / 4:00 PM / a month ago

UPDATE 1-Gulf of Oman tensions cloud Saudi Arabia's potential euro bond sale

(Adds quotes, details, context)

By Tom Arnold

LONDON, June 18 (Reuters) - Saudi Arabia is considering selling its first euro-denominated bonds, a government official said on Tuesday, although bankers have warned Middle East tensions could mean the kingdom pays a premium for any sale.

Debt Management Office (DMO) officials are meeting investors in Europe to provide updates on the kingdom’s diversification of its economy, as well as tap potential appetite for any future bond sales, said the DMO’s head Fahad al-Saif.

The trip, which Reuters reported was arranged by Goldman Sachs and Societe Generale, was a non-deal roadshow, he said, meaning it is not attached to any specific bond issue.

“Usually, when we meet investors we meet existing investors with existing pockets or existing investors with new pockets or new investors with new pockets,” he said at a conference in London.

“At the moment we are focusing on the latter. We are looking at opportunities in Europe.”

The kingdom was doing further studies to understand the euro-denominated market and “what is required from us”, he said.

Romania, Lithuania and Croatia are among recent investment grade euro-denominated issuers deemed by bankers to have conducted successful sales.

But investors say Saudi’s plans might be buffeted by heightened tensions in the Middle East since attacks on two oil tankers at the entrance to the Gulf.

The United States blamed Iran for the attacks. Tehran has denied any role in them.

“The timing of any issue now is not great because of the Gulf of Oman situation and as liquidity in euro-denominated market is lower than that for dollars,” said one prospective international investor who asked to remain anonymous.

“If they do push ahead with an issue now investors would likely demand premium for those two reasons.”

Alia Moubayed, managing director at Jefferies, an investment bank, said the kingdom’s decision on timing and size would be impacted by downside risks to oil prices and global growth, along with heightened geopolitical tensions, which would weigh on investor sentiment and reflect itself in higher risk premium.

Saudi Arabia was also planning to issue an Islamic bond or sukuk in dollars by the end of this year, said Saif.

Riyadh began issuing international bonds in 2016 after lower oil prices hit its finances. Its first international issuance was $17.5 billion, at the time the largest-ever emerging market bond sale.

Since then, it has become one of the biggest international debt issuers, having sold nearly $60 billion in U.S. dollar-denominated bonds.

But future issuance were likely to be smaller in size, he said.

“We are continuing to be an active issuer. We are coming from jumbo to above benchmark. From $17.5, to 12.5 to 11, to 9 to 7.5. That will be the norm going forward in terms of reducing our issuance.”

Reporting by Tom Arnold; editing by Sujata Rao and Ed Osmond

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