Dubai: Recently concluded Bahrain sovereign issuance was a sure success, with investors rushing to buy a new high- yield name, shows the strong appetite for the country’s asset has not diminished.
Bahrain sold an $3.0 billion (Dh11 billion) bond offering comprising $850 million sukuk (7.5 years) and conventional bonds worth $1.25 billion and $900 million with 12 years and 30 years tenors, respectively. Stronger-than-anticipated demand drove the combined book value to close in excess of $15 billion, 5 times oversubscribed. The sovereign issuance was largely aimed at addressing fiscal challenges caused by weak oil prices (break even oil price at $101/barrel), low foreign reserves (estimated at $2.4 billion for 2017, 1.4 times months of imports), wider fiscal deficit (IMF projection: 12.2 per cent in 2017), and higher public debt (76 per cent of GDP). Bahrain is rated BB- by S&P, BB+ by Fitch, and B1 by Moody’s with a negative outlook.
On the economic front, Bahrain is fairly diversified, with no single industry accounting for more than 20 per cent of real GDP and the non-oil sector contributing 81 per cent. The government has large-scale investments in the pipeline, such as Alba’s production capacity expansion, BAPCO modernisation program, construction of a new pipeline to Saudi Arabia, and Bahrain International Airport expansion and modernisation. We are not entirely surprised with the intensity of Bahrain’s oversubscription as investors’ appetite for GCC sovereign bonds have remained robust in 2017 and so has their growing familiarity with the region. Notable issuances this year were Saudi Arabia ($9 billion, about 3.6 times oversubscribed), Kuwait ($8 billion, about 3.6 times oversubscribed), Oman ($7 billion, about 4 times oversubscribed) and Bahrain ($3 billion, 5 times oversubscribed), reflecting a stronger appetite and increased attractiveness of the regional debt market. Thanks to the looming possibility of low interest rates environment (10 year US Treasury yields touched yearly lows of 2.02 per cent) in the near future, GCC issuances will likely lure investors, given the better yield and superior credit quality.
Sovereign wealth fund
However one cannot dispute that prolonged period of low prices has indeed dented the foreign reserves and government balance sheet of Bahrain much more than its GCC peers, and irreparably so. Given no sizeable liquid sovereign wealth fund that it can draw on, Bahrain will continue to entirely depend on debt funding to finance its budget deficit until the government formulates a convincing and credible fiscal policy plan. Post the recent bond issuance, Bahrain will be left with a meagre $7 billion window to raise additional debt before reaching the debt ceiling limit, of $34.2 billion, accounting for 100 per cent of 2017E GDP. In fact, the government debt burden and debt affordability could deteriorate significantly over the next few years in the absence of more aggressive measures, such as taxes and subsidy reforms for fuel/utility tariff. Despite Bahrain’s weaker economic profile, the strong demand from bond investors, with a record 5x oversubscription, suggests that investors perceive Bahrain as “too dear to fail”, given the strong support from its regional peers, especially Saudi Arabia. On that note, Bahrain has access to the GCC Development Fund (a non-budget item), financed by regional peers for the achievement of Vision 2030 development goals. As of June 2017, a total of $6.73 billion was allocated to projects and $1.16 billion was disbursed, in line with project implementation agreements; the fund’s remaining $769 million is due to be allocated in the next phase.
Above reoffer price
Among the three tenors, pricing came in pretty much in line with our expectations; however market would have preferred a better yield pickup especially on the 12 years 2029s. We note that the 7.5 years were priced at 5.25 per cent, compared with the 12 years and the 30 years, priced at 6.75 per cent and 7.50 per cent, respectively narrower than the initial price guidance of 5.625 per cent/7.25 per cent/7.875 per cent. All three tranches traded above reoffer price, with the 7.5 year sukuk having good local demand as most local banks have restriction on holding securities longer than 10 years. The 2029s looked heavy with speculative accounts looking to take profit, as it did not offer much of a pickup over the 2028s. Bahrain 2047s is currently trading at 7.4 years yield to maturity (YTM), which is 130bps higher than its closest GCC peers — Oman 47s. Looking further afield, Bahrain 2047s offer an attractive yield premium in comparison to other similar rated emerging market countries: notably, 28bps higher than Costa Rica 2045s (BB- S&P/Ba2 Moodys/BB Fitch), 17 basis points higher than Lebanon 2037 (B- S&P/Fitch B-) and 176 basis points higher than Turkey 2047 (BB+ Fitch/Ba1 Moody). We like the long end 2047s, it offers a good 73 basis points pickup over the newly issued 2029s bonds- and offers 30 basis points more yield than the Bahrain 2044s.
The writer is a vice-president at Shuaa Capital
