How Saudi Arabia’s bet on Iran backfired

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0:32Good 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 Filippino, and here's the news you need to start your day.

1:11The 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.

1:58The commission declined to comment on the document.

2:06It's game on for a huge pile of debt tied to video game maker Electronic Arts. Wall Street banks have started offloading$18 billion of debt related to the leverage buyout of EA. It was the biggest leveraged buyout financing since the global financial crisis. The sales are going to 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 U.S. 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 their first part of loans that they're going to sell.

2:49It's a close to$6 billion dual currency leverage loan sale. And then there will be another$9 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.

3:25And 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 want to 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.

4:01Is there going to be demand for these loans? There is demand whenever the pricing is right. 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.

4:47So 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 deals this year. And because the market has been very volatile and New Yijuan'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 tag. Michelle Chen is the FT's U.S. credit correspondent. Thanks, Michelle. Thank you.

5:32Investors 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.

6:16Over 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 FT's Ahmed al-Amran in Jeddah. Hi, Ahmed. Hi, Mark. So MBS has dramatically changed his stance on Iran since becoming crown prince. Why is that? 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.

7:00And 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 2023 to 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 2030 back in 2016, his plan was to try to shift the Saudi economy away from its dependence on our revenues towards a shape that is more more diversified, where the country can use different sources of revenues.

8:01And 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 giga projects 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. How badly is it affecting Saudi Arabia and threatening its 2030 vision? Saudi Arabia has been coming under 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 Rastanora.

8:44And more recently, we have been seeing a lot of attempts to attack the vast 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 continues 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?

9:28Saudi 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 U.S. 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 decide to stop this war, they are left with an Iran that is more emboldened, more hardline, and will keep threatening them and maybe hold the state of hormones 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.

10:11So 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-Amran is the FT Saudi Arabia correspondent. Thanks, Ahmed. Thanks for having me, Mark.

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