Bahrain was set to raise $1 billion with an international issue of Islamic bonds on Wednesday but did not proceed with a proposed conventional bond sale because it found the pricing demands of some investors too costly, banking sources said. The deal illustrated the market pressures which Bahrain, rated junk by all three of the world's top credit rating agencies, faces as it finances itself in an era of low oil prices.
When the kingdom started meeting investors last week ahead of its debt issue, it was considering a sale of a 7-1/2-year sukuk, and also an issue of conventional bonds with maturities of 12 or 30 years or both, depending on market conditions, documents from the banks leading the deal showed. On Wednesday, Bahrain went ahead with the sukuk sale, setting the final size of the issue at $1 billion after having received orders of around $2 billion, a modest amount by the standards of Gulf debt issues.
But it abandoned plans for the conventional issue because investors demanded a premium to buy it, the banking sources said. Bahrain's central bank and government information office did not respond to telephone calls and emails seeking comment. Its finances strained by low oil prices, Bahrain had in the past been able to borrow comfortably from international markets because investors believe it can count on support from its wealthier Gulf neighbours, particularly Saudi Arabia.
In recent months, however, some investors have become more concerned by Bahrain's mounting debt levels and the impact of rising US interest rates on its debt. They have begun to demand an explicit statement from Bahrain on its expectations for aid before they commit fresh money, fund managers in Europe and the Gulf said. At the recent meetings with investors, Bahraini officials were asked about the prospects for aid but did not give specific answers, according to fund managers who attended the meetings.
"Bahrain's fundamentals on a stand-alone basis remain among the worst of all emerging market sovereigns globally," said Richard Briggs, emerging markets credit strategist at London-based CreditSights. "That being said, support from Bahrain's neighbours is likely to be forthcoming. Without that support Bahrain would be highly likely to be facing a balance of payments crisis."
The pricing of the new sukuk, which yield 6.875 percent, was generous to investors, fund managers said. Yields on Bahrain's existing sukuk maturing in 2024 and 2025 jumped about 50 basis points on Wednesday when Bahrain announced initial price guidance in the 7 percent area. Dubai's Mashreqbank estimated in a research note that the sukuk's pricing offered investors roughly 55 bps more than its assessment of the instrument's fair value, and significantly more than debt issued by similarly rated sovereigns such as Jordan and Sri Lanka.
Nevertheless, Bahrain may have found it easier and cheaper to sell sukuk than conventional bonds because of unsatisfied demand among Islamic funds and other institutions which only invest in sharia-compliant instruments. Bahrain mandated BNP Paribas, Citi, Gulf International Bank, National Bank of Bahrain and Standard Chartered to arrange the bonds. It issued its latest international bond last September, raising $3 billion and receiving investor orders in excess of $15 billion.