Bahrain looks set to get a vote of confidence from international investors when it offers a 30-year bond worth at least $500 million this week, in its first sale of such a long tenor.
The kingdom on Tuesday opened books for a benchmark-sized 30-year bond issue with initial price thoughts at a yield in the low six per cent area, and the deal is expected to price on Wednesday.
Market participants with direct knowledge of the deal said it would be able to issue its first 30-year debt by taking advantage of good sentiment towards the Gulf in general. Up to now, Bahrain’s longest bond public issue has been 10 years.
The kingdom has long been seen by many investors as the weakest of the six Gulf Cooperation Council countries, both politically and economically.
Sporadic unrest has continued since Bahrain’s Sunni rulers quelled major street protests by members of the large Shi’ite Muslim community in early 2011. It lacks the ample oil reserves of most GCC states and has a high break-even price for its oil, so it runs substantial state budget deficits.
Since 2011 its gross domestic product growth has been heavily dependent on the oil industry, which is vulnerable to swings in global oil prices, as well as government spending – putting further pressure on state finances.
But Bahrain also has the strong political and economic backing of Saudi Arabia, which sees preserving the kingdom’s stability as a priority. So despite its individual weaknesses, it is increasingly been seen as a play on the GCC as a whole – and international investors are hungry for GCC paper.
“Supply from the region is still low so the Bahrain long- dated paper should meet strong investor demand from global accounts such as pension funds and insurers,” said Abdul Kadir Hussain, who oversees about $700 million as chief executive of Mashreq Capital DIFC.
Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, which has about 10 billion euros ($13 billion) in emerging market debt under management, said: “The guidance of low 6 percent is relatively attractive in my view.”
Improving sentiment towards Bahrain can be seen in its five-year credit default swaps, used to insure against a debt default, which have dropped to 161 basis points – close to their lowest levels since 2008 – from 240 bps at the start of this year. They were near 400 bps in late 2011.
CDS briefly spiked as high as 207 bps in July this year, partly because of increased geopolitical tensions in the Gulf triggered by Islamic militants’ advances in Iraq, which could fuel Sunni-Shi’ite tensions in the region.
But the markets have concluded that the GCC, and therefore Bahrain, are able to withstand these tensions.
Affirming a BBB rating for Bahrain with a stable outlook in June, Standard & Poor’s said it was not clear whether the country could resolve its political tensions and its budget remained vulnerable to oil prices. But it predicted that oil prices above $100 a barrel in coming years, plus development aid from other GCC states, would keep the economy growing.
Many bankers in the Gulf are comparing trading in Bahrain’s last international bond, a $1.5 billion, 6.125 percent, 10-year instrument issued last year, to the Dubai government’s $750 million, January 2023 sukuk.
The Bahraini bond is now bid at a yield of 4.28 percent, down 242 bps since September last year. Dubai’s bond yield has dropped 171 bps to 3.81 percent – underperforming Bahrain, despite the extreme bullish sentiment surrounding Dubai because of the renewed boom in its real estate market.
During the July 2013 sale of its 10-year bonds, Bahrain attracted orders from investors worth more than five times the final amount.
That degree of oversubscription is unlikely this time because of the long tenor. The tenor will be welcomed by international investors given the scarcity of 30-year debt from the Gulf, but it is expected to attract only limited interest among Gulf institutions. So Bahrain may have to be content with selling only $500 million or slightly more, some investors said.
“Local demand will be limited for a 30-year tenor, despite fewer deals in longer tenors, so the issuer may have to wrap up with a smaller ticket size,” Hussain said.
The difference between the Z-spreads for Dubai’s January 2023 sukuk and its 2043 sovereign bond is currently about 103 bps.
Bahrain’s 2023 bond is now at a Z-spread of 195 bps. That implies fair value for its 30-year issue of around 300 bps over midswaps, or 6.2 percent – making the initial guidance look accurate, traders said.
Dergachev, describing Bahrain as “now de facto an extended part of Saudi Arabia”, said he was comparing the upcoming Bahrain issue with Saudi Electricity Co’s 2044 sukuk.
The spread between the Saudi Electricity sukuk and the Bahraini guidance implies a concession of about 30 bps, “which makes the deal on first sight quite attractive on a relative value basis, even though I do expect some tightening of the guidance to occur,” he said.
Bahrain chose Citigroup, Gulf International Bank , Mitsubishi and Standard Chartered to arrange the issue.