Moody’s Amplifies Bahrain’s Bad Timing on Bond Sale: Arab Credit

Bahrain, the Persian Gulf kingdom planning to sell bonds as early as this week, faces rising borrowing costs after its yields jumped to a nine-month high.

The island kingdom is set to conclude investor meetings today before what may be its first international sale since issuing $1.5 billion of Eurobonds almost a year ago. The yield on the 6.125 percent 2022 debt has jumped about three times more than Middle East peers this month, climbing 100 basis points to 5.51 percent at 5:12 p.m. in Manama. It rose to 5.67 percent last week, the highest since Aug. 30.

Moody’s Investors Service placed the debt of Bahrain, which hosts the U.S. Fifth Fleet and borders Saudi Arabia, on review for a possible downgrade last week due in part to the “high and rising” oil price needed to balance its budget. The selloff was sparked by prospects that the Federal Reserve, which starts a two-day policy meeting today, will scale back economic stimulus.

“The timing of Bahrain’s possible bond issue looks somewhat challenging,” Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi PJSC, said by e-mail yesterday. “The kingdom should be able to get the deal done if it is willing to pay up in the current environment.”

Paying Premium

Bahrain, which has almost $12 billion of outstanding debt according to data compiled by Bloomberg, is rated Baa1 at Moody’s, three levels above non-investment grade and on par with South Africa and Mexico. Like its neighbors in the six-nation Gulf Cooperation Council, Bahrain’s government relies on oil sales for more than 85 percent of fiscal revenue.

The yield on the 2022 securities has risen in the past five weeks, including a 69 basis-point jump last week as Moody’s released its note June 13. The average yield on HSBC/Nasdaq Dubai’s Middle East Conventional Sovereign U.S. Dollar Bond Index posted a weekly increase of 11 basis points to 4.97 percent on June 14. It was 4.93 percent yesterday.

Bahrain hired BNP Paribas SA, Citigroup Inc., Gulf International Bank BSC and JPMorgan Chase & Co. for the potential benchmark-sized sale.

“It’s increasingly clear that, in a risk-off environment, new issuance will have to come to market at a premium to secondary issues,” Usman Ahmed, Dubai-based head of fixed income at Emirates NBD Asset Management Ltd., said by e-mail yesterday. “Bahrain sovereign debt already trades wide to its investment-grade status, potentially pricing in any impact from the rating agency downgrades.”

Limited Appetite

Still, the country may struggle if it wants to sell bonds maturing in 10 years or longer as appetite for that tenor is “limited” amid debate over whether the Fed will wind down asset purchases, said Aliasgar Tambawala, a fixed-income investment manager at Mashreq Capital DIFC Ltd. in Dubai. Bahrain sold 10-year dollar-denominated securities in 2010 and 2012, according to data compiled by Bloomberg.

Investors are also likely to watch for any Moody’s downgrade. The ratings company said it would conclude its review within three months and expects the rating to remain within investment grade.

Bahrain’s rising debt burden “introduces uncertainty into the country’s longer-term debt sustainability,” Moody’s said. Bahrain will need oil to be at $118.70 a barrel this year to balance its budget, according to Moody’s, which cited the International Monetary Fund. Brent crude, used to price two-thirds of global oil sales, has averaged $108 a barrel so far this year.

Oil Shocks

The nation’s five-year credit default swaps have risen 45 basis points to 224 yesterday since hitting a two-year low on Jan. 25. The contracts rose as high as 430 last year as Bahrain faced the largest popular unrest in the GCC amid the so-called Arab Spring. Economic growth accelerated to 3.9 percent last year from 2.1 percent a year earlier, the slowest since 1994.

“Given the budget’s significant dependence on oil revenues, Bahrain’s government finances are less flexible and its shock-absorption capacity is lower than that of its regional and global rating peers,” Moody’s said in its report.

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