Saudi Arabia’s oh so green bond offering
The Public Investment Fund’s ESG bonds leave a little to be desired
It should come as no surprise that noted ESG titan Crown Prince Mohammed bin Salman’s Public Investment Fund plans to issue green bonds. Why wouldn’t it? Shell boasts of its nature-based solutions and Drax is into forestry. This is simply how the world works today.
Cynicism aside, Saudi Arabia’s bond prospectus is worth a read: the $608bn PIF has never before allowed investors such a detailed look at its books. Anyone interested in the headline numbers can read about them here. Alphaville took a closer look at the debt offering itself.
All bond prospectuses include a section on “risk factors” — a list of things that could go wrong and impact the ability of the issuer and guarantor to fulfil their various financial obligations to buyers. The document prepared by Saudi Arabia’s PIF is no exception.
Plenty of the potential hazards in this prospectus are relatively typical. The Fund’s past performance isn’t indicative of its future results; public companies it’s invested in might do stupid things that damage PIF’s performance; its own credit rating may change etc etc.
Other risks are more Saudi Arabia-specific. First, there is a chance — however slim — that the Fund’s investments in “giga-projects” like Neom, a 26,500km² line-shaped, desert dystopia city fully powered by renewable energy, end up costing more than planned. Yes, we’re shocked too.
As at the date of this Offering Circular, the Fund has four Giga-Projects under development in the Kingdom: Neom, the Red Sea Project, Qiddiya and ROSHN. The Fund expects to invest a significant amount of resources in each of these Giga-Projects, and there can be no assurance that the Fund’s investment in these Giga-Projects will generate the expected return or have the intended economic impact.
The typical risks that are faced in project implementation are significantly exacerbated by the size and complexity of these planned Giga-Projects. Furthermore, there can be no assurance that the Fund’s current or future projects, including but not limited to the proposed Giga-Projects, will be completed within the anticipated timeframe or at all, whether as a result of the factors specified above or for any other reason.
Another potential “risk factor” can be found further down in the document. It turns out the Public Investment Fund’s audited special purpose consolidated financial statements “diverge in certain respects from International Financial Reporting Standards”. How so?
In the Group’s consolidated statement of cash flows for the year ended 31 December 2020, the impact of certain intercompany transactions relating to working capital movements during the year, were not considered due to non-availability of the relevant information from underlying subsidiaries. As a result KPMG Professional Services was unable to determine whether any adjustments were required within the reported movements in working capital, without affecting the net cash from operating activities.
And:
Balances and transactions associated with members of the Board, members of Board Level Committees’, and their close family members were not identified as at and for the year ended 31 December 2020. As a result, KPMG Professional Services has been unable to obtain sufficient appropriate audit evidence as to the completeness of the information with respect to the related party relationships and the disclosures as required by IAS 24 “Related Party Disclosures” . . .
Also:
The Fund expects its audited consolidated financial statements for the period ending 31 December 2022 and all subsequent periods to be fully IFRS-compliant. However, there can be no assurance that the Fund will produce such consolidated financial statements in a timely manner . . .
It’s almost as if lines between the Saudi royal family, local potentates, various executives, the state of Saudi Arabia, other parastatal entities and the Saudi sovereign wealth fund might have at times become a bit . . . blurred?
Separately and reassuringly, the prospectus informs readers that PIF “is not currently” the target of international sanctions. However:
To the extent that the Fund becomes the subject of such sanctions or invests in, otherwise engages in business with, sanctions targets, US persons investing in the Fund . . . may incur the risk of indirect contact with Sanctions Targets.
Less reassuringly (given that more than two-thirds of its assets are invested in Saudi Arabia and the wider Gulf) PIF notes that conflict in Yemen could escalate with attacks on Saudi Arabian infrastructure. Such events “may have a material adverse effect on the Kingdom’s attractiveness for foreign investment and capital,” and could contribute to “increased defence spending” which could in turn hit Saudi Arabia’s fiscal position.
Bond investors with an environmental bent may be willing to look past all of this, of course. And there’s a chance to snap up some of the most verdant green bonds on offer if they do:
No assurance is given by the issuer, the guarantor or the dealers that the use of such proceeds [of the notes issued] for the funding of any Eligible Green Projects will satisfy, whether in whole or in part, any present or future investor expectations or requirements as regards any investment criteria . . .
After all . . .
There is no clear definition (legal, regulatory or otherwise) of, nor any market consensus as to what constitutes a “green” or similarly labelled project.
Whether Saudi punts on the likes of cruise operator Carnival (backed with $440mn of PIF cash), Starbucks ($480mn) and the Russian Direct Invest Fund ($2bn) constitute “green” investments is therefore unclear.
Elsewhere, we learn PIF sees “capital recycling” as one of its main strategies, where it sells down stakes in established industries to reinvest in “emerging sectors” — like 130 year old Newcastle United FC.
We also note that the single biggest holding disclosed in PIF’s bond prospectus — outstripping even its SoftBank Vision Fund punt and a chunky holding in Saudi Telecom — was its 61.62 per cent holding in Lucid, the electric vehicle maker, which it valued at $38.5bn at the end of 2021.
Its shares are down 63 per cent since then, and a later table marks the value of PIF’s stake at $17.4bn as of June 30 2022. Not bad for an initial $1bn investment, but a good example of how markets have turned this year.