Bahrain sprang a surprise on Wednesday in becoming the first Gulf sovereign to issue in the public bond market since the war in the region began, with books opening just hours after its military intercepted Iranian missiles and drones.

The attack underlined the fragile nature of the ceasefire between the US, Israel and Iran, though it didn't stop the sovereign from issuing a US$1bn 10-year bond in an opportunistic move given generally favourable borrowing conditions.

The deal provided a vote of confidence in Bahrain (B/B), which was already struggling before the war with high public debt and large fiscal deficits. Its public finances are under even more pressure given its reliance on the Strait of Hormuz for energy exports. 

“This is the AT1 of the region," said a banker, comparing the credit to risky bank capital notes.

In spite of the turbulent backdrop, investors had already shown they were keen on buying Bahrain risk in the secondary market. Bahrain’s curve has rallied over the past couple of months. The sovereign’s February 2036s – the main comparable for the new issue – were bid at 6.95% on Wednesday, after being quoted at 8.10% on March 23, according to LSEG. In spread terms, the bond had tightened to 245bp over the benchmark from 373bp.

“Their spreads are relatively tight,” said a lead banker. “We received a number of reverse enquiries so we knew there was a demand for a new bond.”

Bahrain priced the June 2036s at a yield of 7.125% after opening books at 7.50% area. The lead banker said fair value was initially spotted at around 7% but with some movement in Bahrain’s curve it ended up being around 7.10%, implying a marginal premium.

“The market has priced in the conflict,” said the lead banker. “It’s just about offering the right concession for primary transactions.”

Bankers away from the deal said the new issue concession was bigger, at around 12.5bp given where the February 2036s were trading.

Books were more than US$2bn at launch. It was a smaller book than the sovereign received in January for its conventional US dollar benchmark when it got US$4.4bn of orders for a US$1.3bn 12-year bond.

Taking into account the circumstances of the new offering, however, it was still a good result, with the potential for the bonds to rally in the secondary. “I think there is still a lot of cash on the sidelines and we think that in any event, if there is a deal or agreement on safe passage [through the Strait of Hormuz], we are likely to see further inflows,” said an emerging markets fixed income trader.

Financial support

A big driver for Bahrain's bonds is the likelihood of support from its Gulf partners, which allows it to trade at levels not reflective of its credit ratings. “We expect that investors still like the credit given the financial support it receives from the wider region,” said Daniel Wood, an emerging market debt portfolio manager at William Blair Investment Management. 

In a sign of support from the region, the central banks of Bahrain ‌and the United Arab Emirates announced in April the establishment of a currency swap agreement with a nominal value ⁠of Dh20bn (US$5.3bn) and a tenor ‌of five ⁠years.

But even with this support, Bahrain needs to turn around its ratings trajectory. In April, Moody’s revised the outlook to negative from stable on its unsolicited rating of B2.

It followed a downgrade to B from B+ by Fitch on February 23, which was just days before the war began. Fitch analysts highlighted that even after launching a fiscal consolidation package in December, the fiscal deficit "will remain large, at a projected 9.2% of GDP in 2027". The analysts estimated the deficit in 2025 was 13.4% of GDP.

Fitch's downgrade came after S&P in November made a similar change to its rating to B from B+.

Whether more Middle East sovereigns will look to immediately follow Bahrain into the public market remains to be seen. A number, such as Abu Dhabi, Kuwait and Qatar, have already raised funds following the start of the war through chunky private placements. Bahrain was also rumoured to have been seeking a PP, although nothing has materialised.

Bank ABC, Citigroup, First Abu Dhabi Bank, National Bank of Bahrain, JP Morgan and Standard Chartered were bookrunners.

Additional reporting by Sudip Roy

Source: IFR