Bahrain develops its bond market (page 2 of 2)

In Sep 2003, United Gulf Bank's US$60mn bond was listed on the BSE. The five years floating note has a coupon of 1% p.a. over Libor for the first three years to 30th Sept 2006, increasing to 1.25% p.a. over Libor if both bondholders and the issuer agree to extend the duration of the issue for two more years.

This issue was rated by Capital Intelligence and was lead managed and underwritten by Burgan Bank, Global Investment House and Kipco Assets Management.

In another development, an Omani based United Finance Company SAOG listed its convertible bonds on the BSE. The secured, optionally redeemable bonds are the first convertible bonds to be listed on Bahrain Stock Exchange.

These bonds, which offer an annual fixed interest of 6%, can be fully converted into UFC common stock by their maturity date of 21st January 2008. The listing of such bonds is yet another step in the diversification of tradable instruments available to investors on the BSE.

The year 2003 also witnessed a bond by Aluminium Bahrain (Alba). A US$200mn floating rate bond issue by Alba was listed in June 2003 on the Bahrain Stock Exchange (BSE). The funds are to be used to finance the construction of Line 5 as well as to finance the corporate expansion strategies of the company. This was the second corporate issue to be listed on the BSE after the issue of Bahrain Commercial Facilities Company.

The interest of investors in the Islamically structured debt instruments, commonly known as sukuk, has been on the rise recently and demand for these instruments will continue to surge. The list of sovereign issuers of these bonds has grown to include Bahrain, Qatar, Lebanon, Turkey and Malaysia in addition to the Islamic Development Bank.

Corporate issuers have also started to tap this market, with Emaar Properties, issuing sukuks of US$50mn in November 2003. The UAE's National Central Cooling Co. (Tabreed) is also expected to launch its US$100mn Islamic Sukuk bond in early 2004. Not only Islamic financial institutions are seeking to invest in the Shariah-compliant bonds, but also the investment community at large is showing interest in these instruments.

The government of Bahrain is committed to replace its short-term conventional debt with medium term sukuks. BMA is also introducing a new system which will allow Islamic banks to sell their sukuks to the BMA, who will then sell it back to them.

This transaction, which is called a repurchase agreement or 'repo' in the conventional bond sector, is aimed at providing banks with short-term liquidity.

A strong and vibrant bond market in Bahrain helps to facilitate the investment needs of large and diversified investors not only in Bahrain but in the region as a whole. This will also greatly benefit governments and corporates to fund their various infrastructure and other projects.