How Saudi Arabia’s bet on Iran backfired

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Good morning from the Financial Times. Today is Wednesday, March 18th, and this is your FT News briefing. The EU wants to see more deals get done, and a monster loan offering is going to test the market's appetite. Plus the war in the Middle East is disrupting Saudi Arabia's push for economic reform. In order to attract foreign investors and tourists for all these projects that the country has spent billions to develop and build, they need stability and peace in the region.

I'm Mark Filipino and here's the news you need to start your day.

The European Union wants to make it easier for companies to merge. And so Brussels is weighing whether to overhaul its merger rules. The changes are meant to limit countries from blocking corporate turnovers. There's been a bunch of that lately. Germany has opposed a takeover of Commerce Bank by Italy's Unicredit, and similarly, Spain wouldn't support a merger between BBVA and Banco Sabadell.

A European Commission paper seen by the FT said that there are certain cases where intervention is needed, but in other cases it may have quote unnecessarily hindered scaling up. EU officials worry that these kinds of interventions risk fragmenting the bloc's single market, and that they're undermining efforts to build pan-European companies that can compete on a global level. The Commission declined to comment on the document.

It's game on for a huge pile of debt tied to video game maker electronic art. Wall Street banks have started offloading eighteen billion dollars of debt related to the leverage buyout of EA. It was the biggest leverage buyout financing since the global financial crisis. The sales are gonna be a test of investor appetite at a time when traders have frankly a lot to worry about. I'm joined now by the FT's US credit correspondent, Michelle Chan. Hi, Michelle. Hey, hi.

So tell us more about what exactly these Wall Street banks have been doing with the debt. Sure. On Monday, JP Morgan, who is leading the deal, has finally come out with the first part of um loans that they're going to sell. close to six billion dollar dual currency leverage long sale and then there will be another nine billion of high yield bond sales coming in the next few days.

And people are very excited about it because it's the biggest leverage buyout ever, as you mentioned. And JP Morgan declined to comment for the article. So, Michelle, why do they want to offload the debt now? That is a really good question because of, you know, the macro uncertainties, Middle East conflicts and a broader sell off of software names in the leverage loan market, it's actually have been a very tough time to launch any sort of deal.

And because of the relative calm in the market in the last few days, banks are actually taking advantage of the market and try to test investor appetite right now. And they also wanna de-risk their balance sheet because they can't hold this debt for a long time because they will have to diversify their exposure and holding one company that is like a huge amount of debt. tied to one company is not a good risk management practice for banks.

Okay. So banks are taking advantage of this relative market calm over the past couple of days, but there are still a lot of concerns percolating out there. Is there going to be demand for these loans? There is demand whenever the pricing is right. Um the loans tied to the leverage buyout is going to be rated at a double B level and the pricing on the deal, according to initial discussions with investors, is going to be more similar to a B rated deal.

Some investors like the debt because EA is a big name in the gaming industry and they have recurring revenue from game subscription and they see a potential to increase the sales going forward with more advertising on the games. It's a deal also with a big equity component. So if the company doesn't perform well in the future, the debt investors wouldn't be the first ones to get hurt.

So Michelle, what will investors be looking out for as these deals unfold? What would a successful sale mean for the market and vice versa? Investors are very keenly looking at the deal as a barometer of future pricing on junk rated debt. This is one of the largest deal this year and because the market has been very volatile and new easy one's activity has been relatively quiet.

This can be a market opener for future deals if it's being priced well, meaning that the final pricing is better than the original price talk. Michelle Chan is the FT's US credit correspondent. Thanks, Michelle. Thank you.

Investors are loving cash these days. They are piling into it at the fastest rate since the pandemic. Now, people were feeling bullish about markets, cash levels were at a record low back in January, but the war in Iran and concerns over private credit have investors running for cover in cash. They're worried that the oil supply disruption and rising energy costs could leave a dent in growth.

And stoke inflation. We'll see if those concerns are front of mind when the Federal Reserve meets later today. Investor sentiment, which is a metric combining cash levels, growth bets, and allocations to stocks, has fallen to a six-month low.

Over the past few years, Saudi Crown Prince Mohammed bin Salman completely changed his tune on Iran. He went from calling Iran's former Supreme Leader the quote new Hitler of the Middle East to wanting a truce between the two countries. But the Crown Prince's olive branch to Iran has not spared Saudi Arabia in the ongoing war.

Here to discuss how the conflict is affecting the country is the FTs Ahmed El Omran and Jeddah. Hi Ahmed. Hi, Mark. So MBS has dramatically changed his stance on Iran since becoming crowned prince. Why is that? Uh the circumstances have changed. When the Crown Prince first came to power, he saw that Iran was pursuing an expansionist agenda that was very worrying to him and he wanted to stand up to that.

And so he pursued a muscular assertive foreign policy that sought to stand up to Iran and challenge its agenda in the region. But then as Saudi Arabia started to focus more and more on its economic reform program, there was a realization that that vision cannot be achieved unless there was peace and stability in the region.

And so we saw a shift in approach towards Iran. Saudi and Iran signed this agreement brokered by China in two thousand and twenty three to uh resume relations and restore diplomatic ties between the two. Tell me more about Saudi Arabia's plan to reform its economy. So when Crown Prince Mohammed bin Salman launched Vision twenty thirty back in two thousand and sixteen, his plan was to try to shift the Saudi economy away from its dependence on oil revenues

towards a shape that is more diversified where the country can use different sources of revenues. And there have been a lot of attempts before, but this one seems like the most serious and the most significant one so far, where the state has spent and invested billions of dollars in gigaprojects to attract foreign investors and also foreign tourists.

And I can imagine those foreign investors and foreign tourists are probably at least a little nervous because of the war. Uh how badly is it affecting Saudi Arabia and threatening its twenty thirty vision? Saudi Arabia has been coming under uh missile and drone attacks. Over the last few days we've seen more and more attacks on Saudi Arabia. We saw Iran target their major refinery on the Gulf in Rastanura.

And more recently we have been seeing a lot of attempts to attack the vast uh Sheba oil field. And so the longer this goes on, the more risk there is to the Crown Prince's economic vision because in order to attract foreign investors and tourists for all these projects that the country has spent billions to develop and build.

They need stability and peace in the region. It's very hard to see how the economic project can succeed if the war continues and instability continue to dominate this region. Yeah. So then I guess the question is, does MBS have any plan to keep his vision intact and keep foreign investors calm during this turbulent time?

Saudi Arabia and its Gulf neighbors find themselves in a very difficult position because they opposed this war before it started. They said they would not allow the US to use their territory and their airspace to attack Iran.

yet they have ended up suffering the most They worry that if the US President Donald Trump suddenly decides to stop this war, they are left with an Iran that is more emboldened, more hardlined and will keep threatening them and maybe hold With the state of home was hostage over time. At the same time, they want this war to end so they can focus more on diversifying their economies and developing their countries.

So there seems to be no good outcomes for them, and they are in a difficult position to try to see what's the way forward out of this. Ahmed El Omran is the FT Saudi Arabia correspondent. Thanks, Ahmed. Thanks for having me, Mark. Before we go, are you a business owner who's been impacted by Donald Trump's tariffs? If you are, we want to hear from you. Send us a voice memo with your name, where you're from, and how you've dealt with the tariffs. We might even play it on the show.

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