Bahrain's debt market shows improved performance

The Bahrain Bourse is home to two debt boards, one for longer-term government and corporate bonds and sukuk (Islamic bonds), and another for short-term Treasury bills issued by the government. There are 15 debt instruments listed on the bond and sukuk market, comprising 10 conventional bonds and five sukuk. Four listings took place in 2018, when the total value of bonds on the exchange stood at $7.34bn.

Government Bonds

Of the 15 bonds listed, 13 are government issues, the newest of which was a threeyear, BD150m ($397.5m) development bond introduced in August 2018. Since 2015 investors have been allowed to subscribe directly to government development bond issues via bourse-registered brokers, the first such initiative of its kind in the region. In order to encourage investment by retail investors, which has historically been limited, the minimum subscription amount for such bonds was set at BD500 ($1320).

Since early 2016 the bourse has also listed government Treasury bills, varying in tenor between three months and one year, of which there were six listed as of December 2018. There were four Treasury bill listings during 2018, with a total value of BD2.58bn ($6.84bn). The market is primarily used by local banks to manage short-term liquidity.

International Issues

The authorities also issue debt on international markets, most recently via a $1bn sukuk with a 7.5-year tenor issued in March 2018. A conventional issue planned for the same time was called off due to what the government saw as excessively high market price demands as concerns about state finances grew – although these have likely been alleviated to a substantial extent by the October 2018 announcement of a $10bn aid package from other GCC members (see Economy chapter).

Corporate Debt

The regular issuance of government debt of varying tenors – something that does not occur in all GCC markets – should facilitate the pricing of corporate debt, supporting the development of a corporate bond market. However, such a market has yet to really take off, with only two corporate bonds currently trading on the bourse: a BD86.1m ($228.1m) conventional bond from local bank BBK, and a $100m sukuk listed by Islamic consumer finance provider Investment Dar Company. Other local corporations, mainly banks, also issue bonds and sukuk, but these are either unlisted – given the low levels of trading activity on the market – or trade on other regional or international markets with greater liquidity. For example, the kingdom’s largest bank, Ahli United Bank, has a sukuk listed on Nasdaq Dubai; while Khaleeji Commercial Bank and Ithmaar Holding, the owner of Ithmaar Bank, both have sukuk on the Dubai Financial Market.

Ahmad Tayara, chief business officer and deputy general manager at Eskan Bank, told OBG that economic uncertainty was keeping corporates on the fence. “2018 was a tipping point for the region and too much has been going on for business to proceed aggressively. It is a wait-and-see period that hopefully will cease once more clarity avails itself in the early months of 2019.” Underscoring such concerns, in October 2018 local financial institution Gulf Investment Bank cancelled a planned sale of a five-year, dollar-denominated bond, citing “prevailing market conditions”.

Regional Demand

The small size of the corporate debt market is in keeping with the nature of capital markets in the region generally, where factors such as oil revenue-funded government social security provision have resulted in a shortage of institutions that typically invest in bonds, like pensions funds. However, low interest rates as well as increased financing requirements resulting from the 2014-15 oil price fall have helped drive a rise in regional debt issuance in recent years, leading to record GCC bond sales of around $85bn in 2017. The recovery in prices in early 2018 and rising interest rates are likely to dampen this trend somewhat, but rates remain low and many regional governments continue to look to debt financing.