TheChek News Flow

The Line development scaled back as Riyadh reconsiders priorities and how best to fund its myriad investments

The “sky’s the limit”, Mohammed bin Salman proclaimed in 2017, a year into his sweeping economic diversification plan that made Saudi Arabia a magnet for financiers and companies looking to tap into the accompanying splurge.

But the crown prince’s plans are facing a reality check as his ambitious Vision 2030 programme reaches its midway point, with repercussions for domestic projects and foreign spending that could ripple through global finance.

With foreign direct investment below expectations and global interest rates still high, the kingdom’s leaders are reconsidering priorities and how best to fund their myriad investments as self-imposed deadlines approach.

Construction at Neom, a futuristic zone that includes a planned “horizontal city” called The Line, is set to be smaller than announced, while a target to double Riyadh’s population to 15mn has been cut to 10mn, said people briefed on the plans.

The Line was meant to extend for 170km and eventually be home to 1.5mn residents, but project officials recently told visitors they were prioritising the “first module”, which would be much shorter and house a fraction of that number.

A person familiar with the thinking at the Public Investment Fund, the sovereign wealth fund behind the plan, said Prince Mohammed “might be finally ready to have some tough conversations” about which projects should progress and which can wait.

“I think the authorities are conscious of this,” said Amine Mati, head of the IMF’s mission for Saudi Arabia. “They’re recalibrating . . . to assess whether some spending needs to be postponed or not.”

The country’s economy is still performing, with the IMF forecasting GDP this year of 2.6 per cent, rising to 6 per cent in 2025. The government expects non-oil growth, which it considers a key indicator when assessing the performance of economic reforms, to be above 5 per cent in the medium term.

Saudi Arabia’s officials who spoke at a World Economic Forum event in Riyadh last month also sought to sound upbeat, while acknowledging “challenges” in funding and a squeeze on local banks’ liquidity.

“We don’t have ego,” finance minister Mohammed al-Jadaan said at the event. “We’ll change course, we’ll adjust, we’ll extend some of the projects, we’ll downscale some projects, we’ll accelerate some projects.”

Authorities have not said which projects would be placed in the different categories listed by Jadaan, but such decision will have an impact on critical choices ranging from borrowing limits to how much they can spend on foreign aid as part of diplomatic efforts to end Israel’s war in Gaza and ensure regional stability.

Amid the different projects undertaken to diversify the economy and unlock new sectors such as mining, tourism and entertainment, Neom is arguably the most closely associated with Prince Mohammed — and the most ambitious.

Neom has announced a dozen different projects in the Gulf of Aqaba since October, in addition to existing plans for The Line and the Sindalah resort island. The special zone was initially touted as a $500bn project, but bankers and analysts say the costs will be far higher.

There has long been scepticism about what Neom would ultimately deliver, with many analysts believing the plans were always overly ambitious. Even for the world’s top oil exporter, there have been questions about how Saudi Arabia would finance all the projects unveiled in recent years, with spending plans announced way in excess of $1tn dollars.

The PIF has become the main vehicle for Prince Mohammed’s ambitions. Other initiatives by the fund, which has $925bn of assets under management, includes a cube-shaped real estate development and an entertainment complex in the capital Riyadh, including the region’s biggest water park, which was unveiled this month.

The sovereign wealth fund is largely being funded by government cash transfers, debt, income from portfolio companies and privatisations. It has been the main recipient of the privatisation of Saudi Aramco, and has since had 12 per cent of the state oil company’s shares transferred to it. Bankers expect another share sale of Saudi Aramco could be used to bolster the PIF’s coffers.

Saudi Arabia has recently won the hosting rights for several major events, which will require significant investments.

The kingdom is set to host the football Asian Cup in 2024 and Expo 2030 and has emerged as the sole bidder for the 2034 Fifa World Cup. A $4.7bn contract was also signed with Italy’s WeBuild to develop a freshwater lake as part of a ski resort to host the Asian Winter Games in 2029.

“There’s not enough money for everything,” said an international banker. “There’s going to be a gap between the money that’s been invested [and] the returns from those investments. That will create questions, doubts, and they’re already downsizing some of those investments.”

Publicly, any talk about scaling back is quickly dismissed for fear of damaging the kingdom’s reputation and capability to pull off such grand undertakings.

“All projects are moving full-steam ahead. We set out to do something unprecedented and we’re doing something unprecedented,” economy minister Faisal Alibrahim said when asked about reining in the scope of The Line.

Fawaz Alamy, a former government official who led Saudi Arabia’s efforts to join the World Trade Organization, said pursuing aggressively ambitious targets is born out of a sense of urgency by the leadership that the country has lagged behind in its stated goals to diversify and must make up for lost time.

“Oil is not going to last for ever,” he said. “You have to be careful [and] you have to diversify.”

Amid a rising tide of adversary drones and missile attacks, laser weapons are finally poised to enter the battlefield.

THE AGE OF the laser weapon is finally upon us.

The United States Army has officially sent a pair of high-energy laser weapons overseas to defend American troops and US allies against enemy drones, the service recently revealed, marking the first publicly known deployment of a directed-energy system for air defense in military history. And, according to a top official, those weapons are actively blasting threats out of the sky.

The weapon, known as the Palletized High Energy Laser (P-HEL) and developed by the American defense contractor BlueHalo based on the company’s 20-kilowatt Locust Laser Weapon System, first arrived in an unspecified location overseas and “commenced operational employment” in November 2022, according to an April press release from the company. A second system arrived overseas “earlier this year.”

While the Army initially declined to indicate where the P-HEL systems were sent and whether they had achieved a “kill” against an adversary drone, citing operational security concerns, the service’s top acquisition official recently confirmed that the new laser weapons had in fact succeeded in neutralizing incoming threats in the Middle East.

“They've worked in some cases,” Doug Bush, the Army’s assistant secretary for acquisition, logistics, and technology, told Forbes this month. “In the right conditions, they're highly effective against certain threats.”

News of the P-HEL’s deployment comes as the US military seeks to aggressively bolster its air defense capabilities amid a dramatic increase in drone and missile attacks against US troops by Iran-backed militias in the Middle East, as well as against US Navy warships operating in the Red Sea by Houthi rebels in Yemen following the October 7 attack in Israel by Hamas.

Since the beginning of the Israel-Hamas conflict, the US Defense Department has been slowly but surely hinting at the use of laser weapons downrange. But the arrival of the P-HEL in the Middle East for operational use is a technological victory for the US military, which has actively pursued research related to directed-energy weapons since the 1970s. Even more significantly, it may also represent a tipping point for the development and use of laser weapons more broadly by militaries around the world.

Light at the End of the Tunnel

Following its creation in 1960 by American engineer and physicist Theodore Maiman, the laser—technically an acronym for “light amplification by stimulated emission of radiation”—almost immediately became a futuristic weapon of choice among both science fiction writers and military planners. This wasn’t surprising: While Maiman touted the potential scientific applications of his discovery when he first unveiled it to the country later that year, the laser immediately conjured up visions in the public consciousness of the Martian “heat ray” from H. G. Wells’ War of the Worlds, so much so that many of the contemporary headlines from its debut were variations of the Los Angeles Herald’s “L.A. Man Discovers Science Fiction Death Ray,” according to Jeff Hecht’s book Beam: The Race to Make the Laser. “In reality, the laser was more of a Life Ray than a Death Ray,” Maiman would later recall thinking of his invention’s medical applications, according to his memoir.

The Pentagon began exploring the military applications of lasers almost immediately, from relatively practical uses like designators for laser-guided bombs to more far-fetched concepts like the Strategic Defense Initiative of the 1980s, also known as “Star Wars.” But only in the past few decades has the underlying technology advanced to the point where laser weapons are effective against their intended targets.

In the mid-2000s, the Air Force successfully used its Boeing 747-based YAL-1 airborne laser to defeat ballistic missiles in flight during tests, while the Army’s Humvee-mounted Zeus-HMMWV Laser Ordnance Neutralization System system deployed to Afghanistan and Iraq to zap landmines, improvised explosive devices, and unexploded ordnance. By 2014, the Navy’s AN/SEQ-3 Laser Weapon System (LaWS) was successfully disabling drones and small boats during testing from the bow of the Austin-class amphibious transport dock USS Ponce in what the service billed at the time as the world’s first “active laser weapon.” (When the Ponce was decommissioned in 2017, the LaWS’s successor system, the Technology Maturation Laser Weapon System Demonstrator, was installed on the San Antonio-class amphibious transport dock USS Portland, which successfully tested it in 2020 and 2021).

Apart from intermittent attempts at developing a non-lethal “laser rifle” over the decades, the Pentagon has generally envisioned employing modern directed-energy weapons primarily for defensive purposes. If successfully developed, high-energy lasers in particular could prove highly effective at short-range air defense missions against helicopters and low-flying attack aircraft, as well as blasting incoming rockets, artillery, and mortars out of the sky, according to a 2023 Congressional Research Service report on the US military’s directed-energy weapons programs. With enough power, a sustained laser beam could neutralize fast-moving hardened threats like cruise missiles and, eventually, even ballistic missiles.

After decades of technological progress, the US military is finally making the dream of laser weapons an operational reality: Not only has the Pentagon increasingly poured money into research and development, spending roughly $1 billion a year on at least 31 directed-energy programs since 2020, but the department has also finally deployed several mature laser weapons alongside US forces abroad in recent years for testing.

Those laser weapons include the Air Force’s High-Energy Laser Weapon System, a Raytheon-developed dune-buggy-mounted system developed for air base defense that saw testing overseas in 2021; the Marine Corps’ Compact Laser Weapon System, which Marines have been training on in the Middle East since 2021; Lockheed Martin’s 60-kilowatt High Energy Laser with Integrated Optical-dazzler and Surveillance (HELIOS), which currently adorns the bow of the Navy’s Arleigh Burke-class destroyer USS Preble; and the Army’s 50-kilowatt Stryker-mounted Directed Energy Maneuver-Short Range Air Defense (DE M-SHORAD) system, or “Guardian,” which consists of a laser turret mounted on a Stryker infantry carrier, a platoon of which arrived in the Middle East in February for “real world testing.” The Army also recently took receipt of a 300-kilowatt “Valkyrie” laser system designed explicitly to deal with incoming cruise missiles.

The adoption of BlueHalo’s Locust laser weapon system in particular likely won’t stop with the P-HEL. In 2023, the company received contracts not just to develop the new 20-kilowatt Army Multi-Purpose High Energy Laser (AMP-HEL) system that’s designed to integrate with the service’s next-generation Infantry Squad Vehicle light utility vehicle, but also a potential laser system for the Marine Corps’ Joint Light Tactical Vehicle that’s set to replace the service’s aging Humvee fleet.

The US military isn’t the only conventional fighting force pushing for a directed-energy element of its air defenses. The UK Royal Navy in April announced that it planned to fast-track the installation of its new 50-kilowatt “DragonFire” high-powered laser onto a warship by 2027 instead of 2032 as originally planned “as the need for weapons to counter drone and missile threats—like those fired by Houthi rebels—grows,” the service said in a statement. Less than a week later, US House Republicans unveiled their long-delayed security assistance package for Israel that included $1.2 billion for the development of the Israeli military’s “Iron Beam” laser air defense system “to counter short-range rocket threats” amid attacks from Hamas militants. Meanwhile, countries like Russia, China, France, India, and Turkey, among others, have all invested heavily in the development of laser systems in recent years, according to the Rand Corporation.

Famed hot-dog business could fetch between $3 billion and $5 billion

The Deal

Kraft Heinz KHC 0.69%increase; green up pointing triangle is looking to sell Oscar Mayer, the big maker of hot dogs, cold cuts and bacon.

The Details

Kraft Heinz recently tapped Bank of America and Centerview Partners to gauge interest in the business, which could fetch something in the neighborhood of $3 billion to $5 billion, people familiar with the matter said. It’s possible there won’t be any transaction.

It’s not clear who might be interested, but potential buyers for a business like this tend to range from private-equity firms to other food-industry players.

The Rationale

Under new CEO Carlos Abrams-Rivera, Kraft Heinz is working to rejigger its portfolio as consumer interest in health and nutrition grows. It’s part of a bid to light a fire under a stock that’s done little in the past five years. The company currently has a market capitalization of about $44 billion.

Kraft Heinz is in the midst of a multiyear effort to improve the nutrition of supermarket staples like its ketchup and juice drinks, aiming to offer healthier options amid rising concern over ultra-processed foods, obesity and chronic diseases linked to diet.

The Context

The company this month reported quarterly results that disappointed investors as demand for some of its products cooled and it grapples with higher input prices. Kraft Heinz doesn’t routinely provide details of Oscar Mayer’s performance, but the company has been working to recover market share losses in cold cuts linked with supply-chain challenges.

Kraft Heinz, which makes grocery-store staples including Lunchables, Maxwell House, Jell-O and Velveeta, last August named Abrams-Rivera CEO after he did a short stint running the company’s North American operations. (He started his career at a Kraft Heinz predecessor before working at Mondelez International and Campbell Soup.)

Rivera has said he’s committed to making the company’s products healthier, in part by cutting sodium and sugar.

Oscar Mayer was once a cultural mainstay, thanks in part to its famous jingle: “Oh, I wish I were an Oscar Mayer Wiener…”

Two bidders for Romanian photovoltaic park withdraw a month after Brussels launched investigation

Two Chinese bidders have pulled out of a tender to supply a solar park in Romania, the latest sign that the EU’s new anti-subsidy powers are having a deterrent effect on companies Brussels claims receive financial support from Beijing.

The European commission on Monday said it closed an in-depth investigation launched last month after two consortiums bidding for the development of a 110 megawatt solar park in Romania withdrew their bids. The project, partly funded by the EU, was being scrutinised under the bloc’s foreign subsidies regulation.

Brussels in recent months has launched several such probes into alleged market-distorting subsidies received by Chinese companies — including raids at Nuctech, a Chinese security equipment supplier.

The two solar consortiums that dropped out of Romania are a German subsidiary of Longi Green Energy Technology, one of the world’s largest makers of photovoltaic cells and solar panels, and two European subsidiaries of the Chinese state-backed power company Shanghai Electric.

Longi confirmed that it had withdrawn from the process, adding that it was committed to its work in Europe to help the bloc with its climate goals. Shanghai Electric did not immediately reply to a request for comment.

This is the second time Chinese bidders in the EU have withdrawn from public tenders following the launch of an anti-subsidy probe, showing they would rathe drop out than share information with Brussels. CRRC Qingdao Sifang Locomotive, a subsidiary of CRRC, the world’s largest train manufacturer, also pulled out of a public auction in Bulgaria after the commission launched a similar probe in February.

Thierry Breton, the EU’s internal markets commissioner, said on Monday that the foreign subsidies regulation “is ensuring that foreign companies which participate in the European economy do so by abiding [by] our rules on fair competition and transparency”.

European solar manufacturers say that a glut of cheaper Chinese photovoltaics is undermining their production, with solar panels costing roughly half what they did at the same time last year due to the oversupply.

Major European solar manufacturers such as Meyer Burger have shut plants or cut their output. China supplies about 95 per cent of the panels used in the EU, according to the think-tank Bruegel.

The China Chamber of Commerce to the EU said on Monday that it remained concerned that the new rules were “a tool of economic coercion under the guise of economic security” that left Chinese companies no option but to withdraw from “troublesome, damaging, and uncertain legal procedures”. 

It decried “the selective transparency and potentially discriminatory application” of the EU’s new legal powers, adding that other non-EU entities taking part in the bidding process for the Romanian solar park did not receive the same level of scrutiny.

She says she will continue philanthropic efforts for women and girls

Melinda French Gates is resigning as co-chair of the Bill & Melinda Gates Foundation, one of the world’s largest philanthropies.

She said she is moving into “the next chapter” with her philanthropy and will have an additional $12.5 billion to commit to her work on behalf of women and girls.

Her last day of work with the foundation will be June 7

More lenders chasing the same deals could sow the seeds of tomorrow’s problems

Private credit has a supply problem.

When investment banks were pulling back from the market for risky loans, private credit was ready to step up and make bigger loans. That attracted a lot of attention, and a lot of new funding.

But now these banks are venturing back into the leveraged lending market, even as borrower demand for new loans has been tepid, threatening to throw the market out of balance. How private credit responds will be one of the truest tests yet of its riskiness.

Generally speaking, there are two types of lending supporting the market for riskier corporate borrowers, who may be smaller or particularly leveraged compared with prime borrowers. In private-credit deals, a single nonbank lender, or a small private group working together, directly arranges a loan with a borrower. In the broadly syndicated loan market, the loans are typically arranged by investment banks then parceled out to an array of investors.

Investors are now coming back to the syndicated market, drawn in by high yields and a solid economic backdrop. Through April, over $13 billion of direct lender loans have been refinanced by broadly syndicated transactions this year, according to PitchBook LCD. Last year, that trend was reversed, with about $20 billion of syndicated loans being taken out by direct loans over the full year.

This surge in lender money supply has meant improved pricing for borrowers. In the first quarter, average spreads, or what borrowers pay on top of a benchmark rate, on broadly syndicated new loans from issuers rated single-B were roughly 1.5 percentage points narrower than they were at the same time last year, according to LevFin Insights.

Better terms for borrowers in the broadly syndicated loan market, in turn, puts pressure on private-credit pricing. Lincoln International, an investment bank, works with managers to value private loans. It recently reported that spreads on larger private-credit deals in the first quarter were about 0.25 to 0.50 percentage point tighter than in the fourth quarter.

Lincoln also noted that lenders were refinancing some of their own borrowers, reducing spread levels in those deals by up to 0.5 to 1 point, often with extended maturities and additional protection against an early repayment of the loan.

“Proactive repricing is an indication they need to keep that money deployed,” said Ron Kahn, co-head of Lincoln’s Valuations & Opinions Group.

One concern is that lenders could respond to piles of dry powder and lower yields by taking on more risk.

“At some point it is possible that there might be too much money,” Kahn said. “But I don’t think that exists yet, and I think private credit has so far been very disciplined.”

Through last year, private credit’s loan performance has been in line with historical norms. For example, among a group of business-development companies publicly rated by Fitch Ratings, which are vehicles that make direct loans, non-accruing debt represented 2.2% of the debt’s cost in 2023, according to Fitch. That was up from 1.9% in 2022, but below the 2.3% mark in 2017.

Still, some observers remain on high alert. Moody’s Ratings in a recent report warned of “competitive escalations” between direct lenders and the broadly syndicated loan, or BSL, market. “We expect that credit quality will remain under pressure as convergence of the BSL and direct lending markets continues and lenders get more innovative with financings,” Moody’s wrote.

One development drawing attention has been an increasing use of what are known as payments-in-kind, or PIKs, in private-credit lending. This allows a borrower to pay a loan with things like additional debt rather than cash—which can be viewed as a worrisome sign of a cash shortage, or a crucial form of flexibility to avoid far worse outcomes. The percentage of certain large new direct-lending loans with PIKs was 9.4% over the past six months, up from 6.2% back in 2021, according to Lincoln.

The private-credit market is still evolving. The biggest firms have talked about a wider universe of lending that goes well beyond competing for the kinds of deals that could also be syndicated by banks.

Larger firms such as Apollo Global Management have invested in expanding their so-called origination platforms that can produce all sorts of different kinds of debt. The bulk of what Apollo does in private credit is intended to compete in the so-called investment grade market, which aims to generate lower yielding but less risky loans attractive to investors such as insurers.

“We can only grow our business as fast as we can originate,” Apollo Chief Executive Marc Rowan told analysts in early May. He said: “The taking of capital because you can take it and then investing it poorly is a quick way to destroy a business. I think we’ve seen lots of examples of that and beginnings of those seeds being set.”

Others focus on middle-market transactions that less often directly compete with the bank-syndicated market. “We’ve never been members of the bigger-is-better cult,” David Golub, CEO of Golub Capital BDC, which makes direct loans, told analysts earlier this month. He added that the “the specter of BSL execution gives large borrowers leverage over private credit providers, especially during periods when the BSL market is resurgent as it is now.”

Private credit has enjoyed a strong run in the past couple of years. But it is what lenders do now that might ultimately matter most.