By Davide Barbuscia and Aziz El Yaakoubi
DUBAI (Reuters) – Bahrain is in talks with banks for a loan of about $1 billion after the Gulf state’s plans to issue international bonds were suspended due to bad market conditions, sources told Reuters.
The small Gulf oil producer, rated “junk” by all the three major credit rating agencies, is seeking funds amid a slump in global oil prices which is hurting its finances.
Bahrain was bailed out by some of its wealthier Gulf allies in 2018 to stave off the risk of a credit crisis after a prolonged period of lower oil prices pushed its public debt to nearly 93% percent of annual economic output.
The latest plunge in crude prices – due to a market share war between Saudi Arabia and Russia and the fallout from coronavirus – is now straining the finances of Gulf Arab states, with Bahrain and Oman particularly vulnerable.
Bahrain hired a group of banks weeks ago for a potential U.S. dollar-denominated bond issue but the deal was suspended due to worsening market conditions caused by the global spread of the virus, four sources familiar with the matter said.
The Gulf state has now started talks with a small group of relationship banks to raise about $1 billion through a loan, three sources familiar with the matter said.
Bahrain did not respond to a request for comment.
A loan would partly shield Bahrain from requests from investors for higher rates. While loan rates are linked to bond market rates, other considerations such as existing banking relationships and banks’ ancillary businesses make loan prices less dependent on the performance of bonds.
“A loan in this market is faster and easier to go,” said one of the sources. “Also, you avoid a roadshow, which is difficult these days with all the travel disruptions.”
Roadshows are meetings that issuers of financial instruments hold with international investors ahead of a planned deal.
Yields on Bahrain’s international bonds due in 2047 have spiked by more that 60% since an output curb agreement between OPEC and non-OPEC partners collapsed on March 6 and sent oil prices tumbling.
Government bonds due in 2047 were yielding 9.9% on Thursday, up from 6% on March 6, according to Refinitiv data. The Bahraini dinar, which is pegged to the U.S. dollar, has also been under pressure in the forwards market.
S&P Global Ratings said this month Bahrain was among the most vulnerable Middle East countries to a drop in tourism due to the coronavirus outbreak.
“This is mostly due to our very low estimate of usable reserves in the sovereign, which magnifies the effect of any drop in current account receipts,” it said.
Bahrain has said it wants to deliver a balanced budget by 2022 as part of a program of fiscal reforms linked to the $10 billion financial aid package received in 2018 from Saudi Arabia, Kuwait and the United Arab Emirates.
(Editing by David Clarke)