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Tue 8 May 2012 06:25 PM

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Bahrain to issue sovereign bond by summer

Year of Arab Spring protests has weighed on economy of non-OPEC oil exporter

Bahrain to issue sovereign bond by summer
Bahrain has seen near daily protests since the start of the unrest in early 2011.

Bahrain plans to issue a sovereign bond by the summer, its central bank said on Tuesday, a sign that the Gulf country is confident it can draw international investors despite ongoing social unrest and budgetary pressures.

A year of clashes between protesters from the Shi'ite majority and security forces has weighed on the small non-OPEC oil exporter, eroding capital parked in its mutual funds, while fiscal handouts have raised the average oil price the kingdom needs to balance its budget to near-market levels.

"Bahrain plans to issue a sovereign bond, with the issue size and tenor to be announced later," a central bank spokesperson told Reuters.

The debt will be issued under a regulatory framework allowing investment by institutions in the US as well as by other investors globally.

The central bank did not provide more details, and it was not clear whether the bond would be a conventional one or an Islamic sukuk.

A key US ally that hosts Washington's Fifth Fleet, Bahrain has been in turmoil since a pro-democracy uprising began last year after successful revolts in Tunisia and Egypt.

IFR Markets, a unit of Thomson Reuters, said earlier on Tuesday that Bahrain planned to sell a US$1.25bn bond with a maturity of seven or 10 years, no later than the second week of June.

Bahrain invited proposals to banks last month but has yet to announce which lenders will handle the sale.

A senior government source told Reuters in April that a bond was not imminent despite the requests to banks, adding that Bahrain was a regular issuer and that the political situation in the kingdom would not negatively influence investor appetite.

Last November, the island kingdom, drew US$1.8bn in demand for a US$750m, seven-year sukuk, its first sovereign issue since March 2010, pricing it to yield 6.273 percent. The order book was made up mainly of Middle East investors, helped by its Islamic structure.

If the size and the timing of the new bond is confirmed, it would take the state's borrowing to as much as US$2bn in just over six months.

Bahrain had initially looked to sell a US$1bn conventional bond at the beginning of 2011 but was forced to postpone due to its worst turmoil since the 1990s - eventually suppressed with the help of martial law and Saudi troops.

But clashes between protesters and riot police have escalated again in recent months.

Five-year Bahrain credit default swaps, which reflect how investors assess the risk that a country will not be able to pay back its obligations, have been easing gradually this year to around 361 basis points on Tuesday from a peak of 408 points at the end of January, according to Markit data.

The turmoil prompted Bahrain, whose credit rating has been downgraded by up to three notches in the last year, to boost government spending by 22 percent from its original 2011 target to BHD3.1bn (US$8.2bn), though robust oil prices have been helping to ease budget strains.

For 2012, the government had forecast a deficit of 8.8 percent of GDP due to slightly lower spending, which at BHD3.1bn was still 14 percent higher than the original 2012 plan.

Bahrain, a regional financial centre, is rated 'Baa1' by Moody's and 'BBB' by Standard & Poor's and Fitch.

Bahrain needed an average oil price of $114 per barrel in 2011 to balance its budget, the highest in the Gulf, up from just US$80 in 2008, the International Monetary Fund has said. Brent crude moved above US$112 per barrel on Tuesday.

Analysts polled by Reuters in March expected the kingdom to post a budget deficit of 3.7 percent of gross domestic product in 2012.

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