Bahrain bond-Sukuk spread balloons as investors disagree on credit outlook

Manama

The price gap between Bahrain’s US dollar conventional and Islamic bonds has widened to record levels, indicating a sharp disagreement between global investors and regional institutions over the country’s ability to avoid a funding crunch, reported Reuters.
The gap has ballooned in the past few months, suggesting European and US investors – who focus on the conventional bonds have been dumping the debt while, Islamic investors – who are mostly from the Gulf region have largely maintained their exposure.
The beginning of the year saw Bahrain’s $1 billion of Sukuk issued in 2016 and maturing in 2024 yielding just three basis points less than its 10-year conventional bond due in 2023 and the gap is now at 160bps.
Bahrain is relying on international debt markets since oil prices slumped in 2014, which is being fueled by a huge budget deficit relative to the small size of its economy and delays in fiscal reforms.
The kingdom scraped plans to sell conventional US dollar-denominated notes because investors demanded high yields raising concern about Bahrain’s ability to continue obtaining external funding at affordable rates, Reuters reported.
Bahrain has been discussing the idea of additional financial aid from Saudi Arabia and other Gulf Cooperation Council allies for over a year, there has been no confirmation such aid will be forthcoming.
Jean-Michel Saliba, Middle East economist at Bank of America Merrill Lynch, said, Bahrain Eurobonds have strongly underperformed Sukuk during recent volatility amid growing credit profile concerns, reported Reuters.
Gulf investors in Bahrain’s Sukuk market are state-linked institutions which factor their governments’ diplomatic ties to their investment decisions and Islamic institutions often face a shortage of Shari’ah-compliant instruments where they can park their investments, reported Reuters.—Reuters

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