Bahrain sells riskiest Eurobond since market reopened

The Gulf kingdom of Bahrain became the lowest-rated country selling dollar bonds since the market hiatus triggered by the Covid-19 pandemic subsided in late March.

Only the strongest borrowers from the Middle East have tapped international markets since then. Bahrain, which has a B+ rating from S&P Global Ratings, sold $2bn in 10-year notes and 4.5-year Islamic securities.

The 10-year bonds yield 7.375 per cent, a substantial yield premium that has attracted more than $7.5bn in demand for the deal so far. The Sukuk bonds yield 6.25 per cent.

The island nation’s $1.25bn of notes due in 2029 traded at 7.16 per cent on Thursday, down 7 basis points from a day earlier. Bahrain has the added protection of a $10bn bailout package provided by its regional allies.

Bahrain is probably the most vulnerable of the Arab energy producers to the collapse in oil prices. As the coronavirus crushed demand for crude, the cost of protecting its bonds against default advanced to the highest level since June 2018, before it won the bailout from its Gulf allies to prop up its struggling economy.

Brent crude is trading around $31.50 a barrel and has lost more than half its value this year. Bahrain needs a price of $95.6 to balance its budget in 2020, the highest in the GCC, according to the International Monetary Fund.

And the IMF estimates its gross official reserves will only be sufficient to cover around 30 days of imports this year, far below the critical level of three months.

IMF fiscal breakeven oil prices in $/barrel

Country	2019	2020	2021
Bahrain	106.3	95.6	84.4
Oman	92.8	86.8	79.8
Kuwait	52.6	61.1	60.3
Saudi Arabia	82.6	76.1	66.0
United Arab Emirates	67.1	69.1	60.6

The prospect of debt defaults by weaker countries, particularly those in Latin America, doesn’t bode well for the bond performance of single-B rated sovereign bonds, according to Carl Wong, head of fixed income at Avenue Asset Management Ltd. in Hong Kong.

Given Bahrain’s wealthier neighbors, including Saudi Arabia, are also feeling the pain from the slump in oil, the yields aren’t attractive enough to compensate for the “substantially higher default risk from Bahrain,” he said.

“Apart from widening budget deficit, its central bank is required to defend the dollar peg and its foreign-currency reserves will be depleted sooner than later,” Wong said.

While junk-rated Guatemala and Paraguay issued $2.2bn of bonds last month, Bahrain is the first single-B sovereign to come to market since the coronavirus rout subsided.

The Gulf kingdom took on a loan of about $1bn to help repay a $1.25bn Eurobond that matured at the end of March, Reuters reported last month.

“Bahrain has historically adopted a pragmatic approach to pricing,” said Doug Bitcon, head of credit strategies at Rasmala Investment Bank in Dubai. “The risk sentiment is good at the moment and pricing is significantly lower than a month ago.”