Bloomberg reported that the Saudi government is considering issuing IOUs to contractors instead of cash payments. This is similar to the approach taken by the government back in the 1990s to preserve cash while also providing cash flow support to the contracting companies.  Since end of 2015, government payments to contractors have seen a sharp slowdown. This has created cash flow problems at contracting companies, which are resorting to bank borrowing to plug the working capital gap. Banks likely to discount IOUs. Similar to 1990s, we believe banks would be comfortable discounting the IOUs. We see this as potentially reducing the repayment risk from contractors, while converting these exposures in to essentially sovereign backed papers. Discounting the IOUs would provide cash flow support to contractors, and reduced their NPLs risk. We might see some replacement of some of the bank loans (extended for working capital financing) by the IOUs. However, we expect margins on the IOUs to be slightly tighter compared to working capital financing extended to the contractors.   Initial view on contractors: positive. We view this as a another sign that the Saudi authorities are determined to find ways to help contractors. Other initiatives included: i) improved payments since end of March, as confirmed by Al-Khodari; ii) public statements with promises to complete all late payments; iii) ban removed off Saudi Binladin Group (SBG) to bid for new projects. We do not yet have information on which contractors would be eligible for IoU issuance, but we would expect the large players, such as SBG to be the main beneficiaries and expect this to have a trickle-down effect on subcontractors in the Kingdom. In an ideal scenario, local banks would be willing to discount these IoUs, which would provide cash flow relief to contractors.   Al-Khodari is a clear beneficiary, being the only contractor with direct relationship with the Saudi government. That said, challenges within the receivable collection process lied within obtaining the necessary documentation to transform approved bills to pay orders to the Ministry of Finance. Only a resolution of the latter would result in major relief to the company’s receivable collection issues. Orascom Construction (OC): is another beneficiary. The bulk of OC’s work is through its Saudi partner, Saudi Binladin Group (SBG), whom we identify as a likely major beneficiary from the initiative. Exposure to Saudi is currently limited to c10-11% of backlog. DSI: despite its large exposure to Saudi (30%) would not a major beneficiary. DSI’s Saudi exposure is scattered amongst project by private developers and public sector entities, rather than directly with the government. Arabtec: indirect exposure to KSA and limited benefit, if any. (Bloomberg, Murad Ansari, Mai Attia, Sara Boutros)   Samba Financial Group: SAR21.95 as of 18 May 2016, Rating: Buy, FV: SAR25.00 per share, MCap: USD11,707 million, SAMBA AB / 1090.SE Banque Saudi Fransi: SAR24.95 as of 18 May 2016, Rating: Buy, FV: SAR30.00 per share, MCap: USD8,020 million, BSFR AB / 1050.SE Abdullah A. M. Al-Khodari Sons Company: SAR12.84 as of 18 May 2016, Rating: Sell, FV: SAR10.49 per share, MCap: USD182 million, ALKHODAR AB / 1330.SE Orascom Construction Limited: EGP54.01 as of 18 May 2016, Rating: Neutral, FV: EGP57.77 per share, MCap: USD718 million, ORAS EY / ORAS.CA Drake & Scull International (DU): AED0.54 as of 18 May 2016, Rating: Sell, FV: AED0.41 per share, MCap: USD333 million, DSI UH / DSI.DU Arabtec (DU): AED1.44 as of 18 May 2016, Rating: Sell, FV: AED1.13 per share, MCap: USD1,811 million, ARTC UH / ARTC.DU