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The government of Bahrain is expected to offer investors significant premiums over its outstanding debt when it issues bonds this week because of growing concern over its finances in an era of cheap oil, portfolio managers said.
Investor meetings are due to end in New York today. A triple-tranche issue may follow, including a long seven-year sukuk issue maturing in 2025, a 12-year conventional bond and, subject to investor interest, a 30-year conventional bond, investors familiar with Bahrain’s thinking told Reuters.
They said Bahrain’s issuance this week could total $1.5bn to $2.5bn. Bahrain’s central bank did not respond to a request for comment. Bahrain is the only one of six oil-exporting states in the Gulf Cooperation Council that is rated junk by all three major credit rating agencies, so it will have to be generous in pricing. All three agencies have negative outlooks on Bahrain.
In July, Moody’s downgraded Bahrain by two notches to B1, saying the country lacked a clear and comprehensive strategy to bring its state budget deficit under control.
Meanwhile, a diplomatic dispute between Saudi Arabia, the UAE and Bahrain on the one hand and Qatar on the other, which erupted in June, has unsettled investors in the region. “In addition to internal factors such as the country’s rating downgrade, geopolitical uncertainty — regional and global — will also weigh a bit on investors’ minds and will demand a price premium, too,” said Apostolos Bantis, credit strategist at Commerzbank.
Two Dubai-based portfolio managers estimated Bahrain’s long seven-year sukuk would offer a premium of around 20 basis points to its existing 2024 sukuk, which it issued last year and which now yields around 5.0%.
Around 10 bps of that premium would be due to time decay, but the other half would be due to funds’ changing views of Bahrain’s fiscal plight.
An Abu Dhabi-based manager said the premium might be wider, at 50 bps. He calculated the mid-point between spreads over US Treasuries of Bahrain’s 2024 sukuk and Bahrain’s 10-year conventional bond maturing in 2026, then subtracted 13 bps to account for unsatisfied demand for sukuk among national and regional Islamic investors. The 12-year conventional bond is expected to price around 6.75 %, compared to the current market yield of 6.58% for Bahrain’s existing 2028 bond.
Bahrain’s potential new 30-year bond would be priced off its existing 30-year bond maturing in 2044, which is now at 7.10%.
Initial price guidance could be about 50 bps higher than the 2044 and then tighten by around 15 to 20 bps during book-building, managers said.
The issuance would once again depend partly on the view that Bahrain would receive aid from some of its GCC neighbours, especially Saudi Arabia, if a financial crisis loomed. There is no clarity on the form and timeliness of such aid, however.
“In order to buy Bahrain as a long-term investor, you need to get comfortable with the thesis that it will ultimately be supported by Saudi Arabia or by other GCC countries,” said Doug Bitcon, head of credit strategies at Dubai’s Rasmala Investment Bank. “The fiscal measures taken by the Bahrain government to date are insufficient to arrest the rapid deterioration in the credit quality of the kingdom as a consequence of the decline in the oil price.”
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