Bahrain to test market with 30-year bond

11 September 2014

GCC sovereigns eager to extend yield curve

Bahrain is set to raise a 30-year US dollar sovereign bond, marking the first time the Gulf state has raised a bond of such length.

The country has only previously issued bonds with tenors of up to 10 years.

The issuance is expected to be more than $500m with some reports saying Bahrain is looking to raise up to $1.25bn. The yield is expected to be around the 6 per cent mark.

Citi, Gulf International Bank, Mitsubishi UFJ and Standard Chartered are the joint lead managers for the issuance.

The issue reflects the growing trend among GCC sovereigns to issue long-tenored sukuk and bonds.

“Bahrain has for years been working to develop its fixed income market and developing more of a yield curve and adding a new tenor to the mix makes sense,” Jarmo Kotilaine, chief economist at the Economic Development Board of Bahrain tells MEED.

The government of Dubai listed a 15-year $750m sukuk at the end of April. It was the first 15-year Islamic bond to be issued globally and it set a new benchmark in terms of Dubai’s access to long-term finance.

Long-dated paper has been a relatively rare phenomenon across the GCC and investor appetite for such long tenors is likely to be high, particularly among institutional investors such as pension funds and insurance companies.

“The GCC region as a whole is clearly one of the brightest points of the global economy with very strong near and long-term growth in place and a long track record of macro-economic stability,” Kotilaine says.

“It is an attractive opportunity for investors and there is a lot of appetite for GCC exposure,” he adds.

Depending on market response to the issuance, the bond will be seen as a sign of potential renewed investor confidence in Bahrain, which has gone through a number of years of political unrest.

Yet, underlying economic and social problems will prevent any imminent upgrade to its credit rating by major rating agencies.

“It is encouraging they can borrow at 30-year maturity, but it does reflect underlying budgetary issues,” Paul Gamble, director, sovereign group, at US rating agency Fitch, based in London, referring to fact the government needs to fund its long-standing budget deficit and high subsidy and wage bills.

Bahrain’s overall deficit was 4.3 per cent of GDP by the end of 2013, up from 3.2 per cent of GDP in 2012. Government debt has also increased by 8 per cent in 2013 to 44 per cent of GDP, according to figures released by Washington-based IMF in June.

The country has also suffered from regular political and often violent disturbances since the Arab Uprisings in 2011. The lack of resolution between the Sunni government and Shia-majority population is seen as a hindrance to economic growth.

“One of our rating triggers is that there should be more meaningful progress towards solving the domestic political unrest. It has had a big reputational impact on Bahrain,” says Gamble.

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