Debt is the easy way for Aramco

This article originally appeared in Money Stuff.

Saudi Arabian Oil Co. is a gigantic company with huge oil reserves and huge amounts of money every year by pumping and selling oil. It is also a state company whose fortunes are closely related to the ruling dynasty of Saudi Arabia, and which has some history of confusing the desires of this dynasty with the needs of the dynasty. business of the company. Also, or rather they – Saudi Aramco and Saudi leaders, jointly want to raise something in the order of 100 billion dollars to diversify the Saudi economy. The rough idea is that investors would give Aramco a lot of money and that Aramco would give it to the Saudi state, and that the Saudi state would invest the money in it. its public investment fund. Outside investors would then have an investment in Aramco, and the state would reduce its investment in Aramco and diversify by using the money from the FIP to buy, like, stakes in technology startups or whatever.

is a question: Should Aramco increase debt or equity ? There are, it seems to me, very good arguments in favor of debt:

1. Aramco is a giant company with oceans of oil reserves and tons of cash, so it can probably repay everything the money that she borrows.
2. deeply linked to the Saudi state and its ruling dynasty, and it would be difficult to distinguish it as a truly independent public corporation with clear fiduciary obligations to its outside shareholders and the type of corporate governance who can handle conflicts of interest.

In a sense, it's a perfect case for debt financing. Debt is an essentially contractual and explicit arrangement; equity is a matter of trust and fiduciary and co-ownership. When you increase equity, you tell investors, "We will take your money, and we can not promise that we will pay it back, but we will all be together and if we manage well, you will do well too. "When you raise debt, you tell investors," We will take your money, and we will repay it with interest, but otherwise leave us alone. "I mean, there are alliances and things." But Saudi Aramco is a pretty huge and pretty good credit that it can probably easily raise tens of billions of dollars in debt without, like, unraveling the Saudi dynasty, or engage in managing conflicts of interest, or operate with all a lot of transparency.Just take the money, repay it, and all is well. 19659006] Whatever the case may be, Saudi Arabia has been working for some time on an initial public offering of Aramco, but the IPO has slipped. legal exposure, shareholder governance rights, etc., which would be required of a public listing in a large foreign financial center.For this, the debt:

the Crown Prince's advisors Mohammed bin Salman push Saudi Arabian Oil Co., as the petroleum company officially says to take a majority stake in a petrochemical company of the country's sovereign wealth fund, Saudi authorities and leaders are aware of the talks.

A potential deal would give the Public Investment Fund between $ 50 and $ 70 billion for all or part of its stake in Saudi Basic Industries Co., officials and executives said. Controlled by the state, Sabic is the largest publicly traded company in the country, with a market capitalization of about 100 billion dollars.

If Aramco made an IPO, the state would sell its shares directly to investors; if she raises debts, then she will have to give this money to the state in return for something, and something seems to be Sabic. The debt would be a mix of bank loans and international bonds, which "could open its accounts to the scrutiny of investors." And: "Neither Aramco nor Sabic are enthusiastic about the deal, said officials and executives, but companies acquiesced under pressure from the prince's advisers. "

There are two main disadvantages to the issuance of debt, however.The first is that it does not diversify you as much as the sale of shares: If Saudi Saudi Arabia sells a stake in Aramco, so it reduces its exposure to the oil industry, if it sells debt, then that debt still has to be repaid even if Aramco's business worsens. the biggest disadvantage is that all governance issues were part of the point of the IPO.You open the books of Aramco, you leave it alone, you give it real public enterprise governance structures, and maybe it becomes more valuable than it was a branch of the Saudi state.Selling debt, and use that debt to do something bizarre that helps the Saudi state even as Aramco opposes it, is a step in the di opposite rection.

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To contact the author of this anecdote:
Matt Levine at [email protected] [19659020] To contact the editor responsible for this story:
James Greiff at jgreiff @ bloomberg.net