DUBAI- Bahrain sold $2 billion in a dual-tranche bond issuance comprising 4-1/2-year sukuk, or Islamic bonds, and 10-year conventional bonds, a document showed on Thursday.

The deal marks a step towards revival for the region's battered debt market. It is the first sub-investment grade public bond issuance from the Gulf since a massive sell-off of debt there in the wake of a crash in oil prices and the spread of the new coronavirus.

The Gulf state sold $1 billion in sukuk at 6.25% and $1 billion in 10-year bonds at 7.375%, after receiving more than $11 billion in combined orders for the notes. It tightened its pricing after it began marketing the notes with an initial price guidance of 6.625%-6.75% for the sukuk and around 8% for the 10-year notes.

The small oil producer, which was bailed out in 2018 with a $10 billion aid package from its wealthy Gulf neighbours to avoid a credit crunch, needs to bolster its finances to plug its budget deficit.

"The demand showcases strong investor appetite for Bahrain risk even though the landscape of unconditional support from its GCC neighbours has come under increased scrutiny," a Dubai-based fixed income strategist said.

"Pricing leaves around 30 bps on the table for both the tenors for the investors, and the securities should do well in the secondary market," he added.

In a presentation for investors seen by Reuters, Bahrain said it expects a deficit of 4% of GDP this year, down from 4.7% last year. The International Monetary Fund has said it expects Bahrain's fiscal deficit to jump to 15.7% of gross domestic product this year from 10.6% in 2019.

The fixed income strategist said the discrepancy was because the figures Bahrain gave were estimates from end-February, meaning they did not factor in the oil price crash and the coronavirus pandemic's impact.

Jason Tuvey, senior emerging markets economist at Capital Economics, said in a research note on Thursday that Bahrain would likely need more financial support in the coming years despite the debt sale.

"The collapse in oil prices means that Bahrain will probably have to draw down the (Gulf) support package at an even faster pace and there is growing prospect that the level of financing will need to be increased," he said.

"Bahrain's close political ties with Saudi Arabia mean that this will almost certainly be forthcoming and this is a key reason why we expect the dollar peg to remain intact."

Bahrain hired Bank ABC, Gulf International Bank, HSBC, JPMorgan, National Bank of Bahrain and Standard Chartered to arrange the deal, sources have said.

(Reporting by Davide Barbuscia and Yousef Saba; Editing by Tom Hogue and Hugh Lawson) ((Yousef.Saba@thomsonreuters.com; +971562166204))