Global Arab Network | Bahrain expanding into the international bond market

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Bahrain expanding into the international bond market

Thursday, 11 February 2010 10:58

Bahrain is planning to venture deeper into the international bond market, with past successes built up over many years assuring keen interest in any offering floated.

The solid reputation Bahrain’s money markets enjoy mean that the country has less trouble than some states in the region and beyond in drawing in investors while the low level of risk attached to a Bahrain bond or other issue means not having to pay well over the odds.

In late December ratings agency Standard & Poor’s reaffirmed Bahrain’s credit rating at “A”, while continuing to evaluate the Kingdom’s economic outlook as stable, the same as for 2009.

According to Rasheed Al-Maraj, the governor of the Central Bank of Bahrain (CBB) – which serves both as the country’s reserve bank and regulator of its capital markets – one of the strengths of Bahrain’s financial sector is the sound legal and regulatory regime that has been put in place to ensure that there is an environment conducive for doing business.

“Over the years, we have seen growing interest not only from the region itself but also from outside looking into Bahrain, because we have been doing this for the last four decades,” he said during an interview with television network CNBC at the end of January.

It is a reflection of investor confidence in Bahrain’s capital markets that the CBB’s regular issues of short- to medium-term bonds, treasury bills and securities are almost invariably oversubscribed. It is common for the bank’s issues, both conventional and sharia-compliant, to attract investor interest of 200% to 450% above the face value of the offering.

The bank’s most recent foray into the market, a treasury bill issue of $66.5m carrying a maturity of 91 days offered on February 8, was oversubscribed by 453%. The situation was much the same for the CBB’s most recent short-term sukuk al ijara (Islamic leasing bonds) and sukuk al salam (Islamic securities).

The bank and the government will be hoping that investor enthusiasm for the CBB’s regular offerings will carry over to a planned $1bn conventional sovereign bond issue, announced in late January.

The bond, which is expected to be issued in March or April, will be used to fund state expenditure, according to a statement by a spokesperson for the central bank on January 24, with the yield to be driven by market conditions at the time of release, while the bond will have a maturity of 10 years.

Media reports suggest that the issue will target US investors, rather than the local or regional market, with sources saying the bond will be a 144A transaction, which is regulated under the US Securities and Exchange Commission, though this has yet to be confirmed by the CBB.

The planned conventional bond follows a highly successful sukuk issue in June last year. Initially intended to generate $500m, the offer was increased to $750m after a wave of investor interest, which ultimately saw an order book of some $4bn, highlighting the international market’s appetite for Bahraini debt.

Both Standard & Poor’s and rival international credit rating agency Fitch assigned the $750m sovereign sukuk al ijara issuance an “A” rating, a level that served to stimulate further support for the offer.

CBB officials said the bond would also serve to establish a yield curve benchmark for longer-term Islamic securities, flagging Bahrain’s intention to plunge deeper into the international market.

While Bahraini bonds, both private and state, have proved popular recently, the local market has at times been subject to adverse external factors, factors that have multiplied over the past two years as the worldwide financial crisis surged and subsided.

With further uncertainty roiling through global capital markets due to concerns over the debts of Portugal, Spain and Greece, as well as those of Dubai, investors are becoming somewhat more circumspect, even when it comes to Bahrain.

On February 7, the Esterad Investment Company issued a statement through the Bahrain exchange that it was withdrawing from plans to raise $18.6m in convertible bonds because of less-than-favourable market conditions. “The decision for retraction was in light of the prevailing conditions of the lending markets and liquidity regionally and globally,” the company said.

The proposed bond had carried a call option on the stock that the bondholders could exercise if they so chose at the end of years three, four and five, allowing them to convert each bond held into a specific number of ordinary shares in Esterad. The company had said proceeds from the offering were to be used to support Esterad’s corporate strategy of targeting investment opportunities across all asset classes in regional and global markets.

Though the opportunities identified by Esterad may still be there, the willingness of investors to take advantage of them appears to have been blunted by the recent return of unease in international capital markets. While this could make new private issuances pricier for private sector players, Bahrain’s gilt-edged state securities should still enjoy an advantage.

Global Arab Network

This article is published in partnership with Oxford Business Group

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