Bahrain sees strong demand for $750m sukuk

Bahrain's $750m Islamic bond issue last week is a part of the Gulf Arab state's plan to create a yield curve, its central bank said on Sunday.

"Bahrain's return to the sukuk market through a longer dated issue is part of our desire to create a yield curve in the international sukuk market in the same way that we have in our domestic market," said Sheikh Salman bin Isa al-Khalifa, executive director of banking operations at the central bank.

The island kingdom, hit by political upheaval earlier this year, drew $1.8bn in demand for its seven-year Islamic bond, or sukuk, its first sovereign issue since March 2010, pricing it at a yield of 6.273 percent on Wednesday.

"The strong demand from new as well as existing international investors is a confirmation of investor confidence in our credit, particularly in view of the volatile market backdrop," Sheikh Salman said in a statement.

The issue was its first seven-year international sukuk offering and the order book was allocated 62 percent to Middle East investors, 20 percent to European and 12 percent to Asian, the central bank said.

Investor meetings - which took place in Saudi Arabia, Kuala Lumpur, London and Singapore - ended last week, and BNP Paribas , Citi, and Standard Chartered were arranging the deal.

The central bank also said the certificates will be issued by the Central Bank of Bahrain International Sukuk Company and are expected to settle on November 22. The certificates will be listed on the London Stock Exchange, it said.

Bahrain had initially looked to sell a $1bn conventional bond at the beginning of the year but was forced to postpone plans, facing its worst unrest since the 1990s.

Tensions have persisted in Bahrain, which was rocked earlier this year by demonstrations mainly by majority Shi'ite Muslims demanding political reforms and equality in the Sunni-led kingdom, a US ally and home of the US Navy's Fifth Fleet.

The turmoil prompted Bahrain, whose credit rating has been downgraded by up to three notches this year, to boost government spending by 22 percent from its original 2011 target to BD3.1bn ($8.2bn), though robust oil prices are helping to ease budget strains.

Analysts said the issue may help Bahrain reduce its budget gap, set at 10.1 percent of gross domestic product (GDP), or BD835.7m this year.

For 2012, the government forecasts a deficit of 8.8 percent of GDP due to slightly lower spending, which at BD3.08bn is still 14 percent higher than the original 2012 plan.

Bahrain is rated 'Baa1' by Moody's and 'BBB' by Standard & Poor's.

Analysts polled by Reuters in September forecast that Bahrain needs an average oil price of $108 to balance its budget, the highest in the Gulf, and that it will see a fiscal deficit of 1.1 percent of GDP in 2011.