'This is something the government has been looking at for some time,' says an international banker looking at the transaction. 'They went to great trouble to get a rating from S&P[ Standard & Poor's] and now they're ready to go. The only concern is that with the split rating, they might not get the pricing they are hoping for.'

It is understood that up to six international banks have entered into close negotiations with the Ministry of Finance and National Economy over a lead-arranging mandate, although no formal selection process has been established. They are thought to include BNP Paribas, Citibank, HSBC Investment Bankand JP Morgan Chase & Company.

'It is probable that a joint mandate will be issued to two banks,' says one of the interested bankers. 'It is not clear just when a mandate will be awarded, but the feeling is that there is momentum behind this transaction and it could be done very quickly.'

Whichever institutions are mandated, they will be faced with marketing debt instruments with split ratings. S&P initiated its coverage of Bahrain with an A- long-term foreign currency rating, the same as its rating for Qatar and several notches higher than the Baa3 issued by Moody's Investors Servicein August.

'It is extremely rare to have such a large split rating and people will tend to look at the lower rating when it comes to price,' says an emerging market bond specialist at Morgan Stanley. 'A Bahrain issue would attract attention because it has rarity value, and with treasuries trading so low this is a good time to enter the market. However, uncertainty over the Iraq question could impact international appetite for any Gulf issuance.'

Some indication of pricing can be found in Qatar's 10-year bond, which was trading in late October at about 135 basis points (bp) over US treasuries. Given that the instrument matures in 2009, on an interpolated basis a launch spread of about 200 bp would price a Bahrain issue at the same level as Qatar. Bankers say that Bahraini debt will probably be priced outside similarly dated Qatari exposure.

Institutional investors are likely to look beyond the sovereign ratings to the underlying robustness of the Bahraini economy. Strong gross domestic product (GDP) growth has been maintained at about 5 per cent a year over the last four years and economic diversification programmes have been successful (Bahrain, MEED Special Report, 13:9:02, pages 28-32). However, a $500 million bond, added to a sovereign loan taken earlier this year and three major project-related borrowings, would increase government liabilities - some direct, some contingent - by $3,500 million. Equivalent to more than 40 per cent of GDP, the increase in debt will transform government finances.