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Tue 23 Feb 2016 08:38 PM

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Bahrain launches $600m bond sale after downgrade to junk

Bahrain cancelled a $750m bond sale last week after Standard & Poor's cut the kingdom by two notches to 'BB/B'

Bahrain launches $600m bond sale after downgrade to junk
Aerial view of the skyline of Manama, Bahrain, on Thursday, Sept. 24, 2009. Bahrains economy will grow 3.5 percent to 4 percent in 2010, keeping the same pace of expansion as last year, Finance Minister Ahmed Bin Mohammed Al-Khalifa told Al-Arabiya TV channel.

Less than a week after its credit rating was downgraded to junk status, Bahrain's government demonstrated on Tuesday that it still had access to the international credit markets by launching a $600 million bond sale.

Last Thursday, Bahrain cancelled a $750 million bond sale after Standard & Poor's cut the kingdom by two notches to 'BB/B', making Bahrain the first of the wealthy Gulf oil exporters to fall below investment grade in the current downturn.

S&P cited the damage caused by low oil prices to the state finances of Bahrain, which has much smaller financial reserves than its neighbours.

But the kingdom's ability to stage a new debt sale on Tuesday suggested it remained able to finance itself after the downgrade at only a moderately higher price. Orders for the new offer exceeded $900 million, a document from lead managers showed.

Pricing for a $275 million, five-year tranche was set at a yield of 5.950 percent, while a $325 million, 10-year tranche was set at 7.650 percent.

That compared with 5.70 percent for the five-year portion and 7.40 percent for the 10-year tranche at last week's cancelled sale. Both offers were reopenings of a $1.5 billion bond issue originally made by Bahrain in November.

Central bank governor Rasheed Mohammed al-Maraj told a business conference in Manama on Tuesday that Bahrain would take drastic steps to keep its budget deficit under control. In the last few months it has raised gasoline prices and removed state subsidies from meat to save money.

"This is an opportunity for us to restructure our economy. We have been chained by an umbrella of subsidies," he said.

Maraj also reiterated the kingdom's commitent to the peg of its dinar currency against the US dollar, saying pressure on the kingdom's finances would not shake it.

However, he gave no details of future austerity steps by the government and said no decision had yet been made on an important measure to raise revenues, the introduction of a broad corporate income tax.

Many investors in Bahraini bonds say Saudi Arabia, which is closely allied to Bahrain, would provide aid if necessary to avert any financial crisis.

However, pressure on the dinar in the forward foreign exchange market in the last few months shows some banks are uncertain about the future.

Adding to the uncertainty, the central bank stopped last July publishing on its website a monthly report on money supply and banking system statistics. It did not respond to questions on why the report was discontinued.

Bank ABC, BNP Paribas, Citigroup, HSBC and JP Morgan, which arranged the original bond issue in November and the cancelled offer last week, are leading Tuesday's sale.

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