Wealthy Nations Daily Update - Bahrain

The Kingdom of Bahrain has been a regular issuer in the Eurobond market and recently tapped the market for USD1.5bn by issuing 2 bonds: USD 800m of 7% 26-Jan-2026 and USD700m of 5.875% 26-Jan-2021. While the face value of the coupon may seem tempting at current levels, to us any perceived value looks to be a mirage.

These issues trade ~2.3 notches cheap on our models but this is on the assumption that Bahrain retains its BBB- ratings from S&P and Fitch. Given the recent rating downgrades that have already taken place to Saudi Arabia and Oman, Bahrain looks at risk of a similar fate; for us current trading levels do not offer sufficient compensation for this risk. Moreover, a downgrade for Bahrain would mean ejection from the investment grade universe into the realm of junk. S&P and Fitch are timetabled to announce rating updates for Bahrain on 11 December and 4 December respectively.

Bahrain is negatively impacted by lower oil prices alongside Saudi Arabia and Oman, and in some respects it seems to be more negatively impacted. Bahrain is starting from a much weaker perspective in terms of government debt level: according to Moody’s the general government debt to GDP level was ~44% in 2014 and is forecast to rise to close to ~69% in 2016. Oman and Saudi Arabia’s general government debt to GDP was 4.9% and 1.6% respectively at the end of 2014 and in 2016 this is forecast to rise to ~20% and ~12% respectively. Moody’s estimate that Bahrain will have the largest financing needs as a percentage of GDP: it’s also not helped by its weaker position in terms of sovereign wealth fund assets to government expenditure of only 0.6x against 1.5x for Oman and 2.4x for Saudi Arabia. All 3 countries are impacted by lower oil prices having high fiscal breakeven prices: for 2014 the IMF estimated $106.3 for Oman, $102.3 for Saudi Arabia and $120.6 for Bahrain.

S&P said in its June affirmation of Bahrain’s rating where it retained a negative outlook; “We could lower the ratings over the next year if our fiscal deficit assumptions are materially exceeded, or if measures to combat falling government revenues or structurally improve Bahrain's public finances are not put in place. We could also lower the ratings if economic growth is substantially lower than our current projections.” S&P cut its Brent crude oil price assumptions on 24 September to $50/bbl for 2015 (from $55/bbl), $55/bbl for 2016 (from $65/bbl) and $65/bbl for 2017 (from $75/bbl) implying their estimates for Bahrain’s fiscal deficit will come under pressure.

Fitch downgraded Bahrain to BBB- in June but moved the outlook to stable. In terms of the potential for further downgrades Fitch noted: “The main factors that individually, or collectively, could lead to negative rating action are: -A rise in government debt/GDP above our current forecasts, for example owing to an inadequate policy response or a sustained period of oil prices below our current forecasts. -Severe deterioration of the domestic security situation.” At the time of this rating Fitch was working with the assumption that oil prices will average $65/bbl for 2015 and $75/bbl in 2016 but on November 9 Fitch downgraded their general price assumptions for Brent crude to $55/bbl for 2016 and $65/bbl in 2017. In its June review Fitch noted that Bahrain’s general government debt was 45.1% of GDP in 2014, and had forecast it would rise to 54.2% in 2015 and 58.6% in 2016 but these figures look like they may have to be revised upward.

Saudi Arabia is different to Bahrain. The lack of issuance means there is no USD yield curve for the Saudi Arabian sovereign. But consider quasi sovereign issues such as Saudi Electric 5.06% 43, which is 81% owned by the government, and given it is a government related entity, S&P equalises its ratings with that of the sovereign and downgraded it to A1 on a foreign currency issuer basis. But even on this basis, it looks good value trading over 4 credit notches cheap on our models on a yield of 5.75%, although it may lack short-term positive catalysts. For this reason we think that any USD quasi sovereign or sovereign issuance from Saudi Arabia is worth considering.