Bahrain Reopens Eurobond Sale Revoked After S&P Downgrade

  • Deal was annulled after S&P cut ratings two levels to junk
  • Gulf nation seeks to raise $600 million in bond tap deal

Bahrain reopened a bond sale it annulled last week when Standard & Poor’s cut the Gulf Arab nation’s credit rating to junk a day after they were priced.

The country reduced the total size of the tap of two existing bonds to $600 million from $750 million at the axed sale, while borrowing costs were raised by 25 basis points, according to a person familiar with the transaction, who asked not to be identified because the information is private. Bahrain revoked the sale of 2021 and 2026 bonds completed Feb. 16 after S&P downgraded it by two levels to BB the following day, citing the "structural frailty" of public finances due to the rout in oil.

S&P lowered Bahrain because its vulnerability to slumping oil prices has increased since 2009 as government expenditures started to rise in response to the global economic slowdown and civil unrest in the country. Preliminary 2015 fiscal data indicate a wider-than-anticipated deficit of about 11.5 percent of economic output, compared to 10 percent expected previously, the rating company said.

"Investors are being fairly compensated for Bahrain risk," said Doug Bitcon, a fund manager at Rasmala Investment Bank Ltd., who bid for the bonds last week. "The S&P downgrade doesn’t really make a big difference except for those portfolios where their investment mandate limits them to investment-grade assets as rated by all rating agencies."

Oil Exposure

The offering today includes $275 million more of 2021 bonds at a 5.95 percent yield and $325 million of 2026 notes at 7.65 percent, according to the person. Those rates represent a premium levels for the existing bonds as of Monday, according to data compiled by Bloomberg.

"The premiums aren’t very attractive considering the issuer’s exposure to the oil market," said Denis Manzi, director at Fagus Multimanager SICAV, who sold his holdings in Bahrain 2021 bonds on Feb. 15. He isn’t buying the new tap. Still, "both the issues could be appropriate for a long-term investor, as Bahrain could benefit in case of a stabilization of the oil market.” 

Bank ABC, BNP Paribas SA, Citigroup Inc., HSBC Holdings Plc and JPMorgan Chase & Co. are managing the new debt offering.

Bahrain’s sale will help the primary market in the six-nation Gulf Cooperation Council, where bond sales have got off to the slowest start in five years. Issuance this year has dropped 57 percent to $1.66 billion, according to data compiled by Bloomberg.

"Many of the natural buyers of Bahraini government debt are local financial institutions which enjoy a zero percentage regulatory risk weighting against GCC government exposure, so from that perspective, there will still be demand at these yields, particularly in the five-year paper," Bitcon at Rasmala said.

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