Market Devouring Record Gulf Bonds Won't Touch Oman, Bahrain

Oman and Bahrain are stuck on the sidelines of the international debt markets after a record borrowing tally by Gulf Arab economies this month underscored a divide between the region’s strongest and weakest sovereigns.

Facing external financing needs that Goldman Sachs Group Inc. estimates at $5.5 billion this year, Oman and Bahrain are all but shut out from bond funding, waiting for their yields to retreat before wading into the market.

Their wealthier neighbours in April raised a combined $24bn in sales that collectively drew about $140bn in investor demand.

“Oman and Bahrain will be unlikely to issue unless markets stabilise,” said Abdul Kadir Hussain, head of fixed-income asset management at Arqaam Capital in Dubai. “High-yield pricing remains very dislocated.”

Precarious

Although no nation in the Gulf is immune to the historic collapse in oil prices and the coronavirus pandemic, Oman and Bahrain stand out for their precarious public finances and strained reserves. Investors who piled into the sultanate’s debt sale less than a year ago are now drawing the line at stronger borrowers better able to absorb the shock to their economies.

Bond sales this month by Qatar, Abu Dhabi and Saudi Arabia - which have single-A or double-A ratings - account for more than half of the amount raised by governments across the emerging world.

Bahrain and Oman are rated junk by the three major credit assessors. The International Monetary Fund predicts their budget deficits will exceed 15 percent of gross domestic product this year.

Brent crude is trading below $30 a barrel, after losing more than half of its value this year. This month’s OPEC+ deal to slash supply has failed to lift prices because demand has plunged amid the coronavirus pandemic.

Backstop

“The current environment affords an opportunity to pick up a solid investment-grade sovereign at valuations that are attractive versus historical spread levels,” said Todd Schubert, Singapore-based head of fixed-income research at Bank of Singapore Ltd. “It will be tougher and costlier for Bahrain, and even more so for Oman.”

Unlike the sultanate, Bahrain benefits from the backstop of $10bn in financial aid secured from its regional allies, including Saudi Arabia, in 2018. The island nation’s funding requirement is projected to grow to around $3.8bn this year, net of the $1.8bn financing from the 2018 Gulf package, according to Goldman.

The government secured a loan of about $1bn to repay a $1.25bn Eurobond that matured at the end of March, Reuters reported.

Even if it fails to raise money from the international bond market, support from its allies remains assured, according to Ehsan Khoman, head of Middle Eastern research at MUFG Bank in Dubai.

Still, the IMF estimates its gross official reserves will only be sufficient to cover just over 30 days of imports this year, far below the critical level of three months.

The difference in yields between Bahrain’s bond due 2029 and Saudi Arabia’s debt of similar maturity has more than tripled to 4.3 percentage points, from 1.7 percentage points at the end of last year.

Oman, vulnerable after lagging behind peers in implementing fiscal reforms, has tried to adjust to lower oil prices by scaling back spending to safeguard reserves and ease pressure on its currency peg.

Worries

Earlier this year, the government explored the option of raising more than $1 billion in loans.

Its dollar debt, the worst-performing in the region this year, reflects worries among investors. The spread on its bond due 2029, issued last year, is near 1,000 basis points over US Treasuries, generally considered the threshold for debt to be classed as distressed.

Oman faces $5.7bn in refinancing obligations from this year through 2021, including a $1.5bn Eurobond maturing in June next year, according to MUFG Bank.

“While the fiscal strength is worsening and debt is rising, the country has various levers at its disposal before default becomes a real concern,” MUFG’s Khoman said. “Market expectations are that the country will accelerate much-needed structural reforms or seek regional financial assistance à la Bahrain, and in the most acute scenario turn to the International Monetary Fund for a rescue package.”