Bahrain develops its bond market

Government gilts continued to dominate the listed bonds market in Bahrain. However, gradually there has been some bonds from corporate sector as well.

Bahrain Commercial Facilities Company has two bonds listed on the BSE, while in 2003 Aluminium Bahrain's bond issue also got listed on the exchange.

The total listed Bahraini bonds amounted to about US$1.295bn as of Dec 2003 - representing about 15.8% of the GDP of Bahrain. This percentage is slowly improving and there is ample scope for further improvement.

The year 2003 witnessed a number of government bonds as well as bonds from the corporate sector. In one of the biggest offering in Bahrain, the government came out with a US$250mn Government Islamic Securities in May 2003.

It was the largest-ever offering by the Bahrain Government since it launched Islamic sukuk programme in September 2001. The bond, which carries a maturity period of five year, carries a rental return of 60 basis points over the six month LIBOR.

This bond is backed by an Ijara lease on the country's airport. This was the seventh issue of Islamic bonds to be listed on the Bahrain Stock Exchange. The eighth issue of US$50mn Islamic bonds (Ijara Sukuk) hit the market in December 2003. The eighth issue was oversubscribed by nearly 60 per cent.

The Government of Bahrain undertakes to buy back the Ijara sukuk at their nominal value at the end of the lease period. The guarantor enjoys a rating of A- from international rating agencies, Standard & Poor's and Fitch. With this offering, eight Ijara sukuk issues worth a total of US$780mn were made by the BMA since 2001.

A ninth issue of Ijara sukuk, worth US$250mn, is scheduled to hit the market in early 2004. The BMA has mandated Citi Islamic Investment Bank, a wholly-owned subsidiary of US-based Citicorp, to arrange the international issue, which carries a maturity of five years.

The upcoming issue is BMA's first international issue and the second international issue to be made by the Government of Bahrain. The upcoming offering is the second to be made by the BMA through a financial institution. The earlier offerings of Ijara sukuk were made directly by the Agency.

The issue will be endorsed by the International Islamic Financial Market, which is based in the Kingdom of Bahrain, and listed on the Luxembourg Stock Exchange and the Bahrain Stock Exchange.

Not only the Bahraini government is tapping the Sharia-compliant bond market, but also other sovereign borrowers and corporates have been targeting these markets. There has been a US$600mn sovereign issue from Malaysia that came to the market in June 2002 and was listed on BSE in Sep 2003.

The Malaysia Global Sukuk is the first Malaysian bond issue to be listed on a stock exchange in the Middle East region. The Sukuk is a floating rate note maturing in 2007. This sukuk is backed by an Ijara lease on a single piece of government property.

Bahrain Monetary Agency's medium and long term Ijara sukuk issuance programme is complemented by a rolling programme of monthly issuance of short term bonds, Sukuk Al Salam, which are also very well received by the market. The government of Bahrain wants to reinforce the country's role as a global Islamic finance hub. Attempts are being made to establish the Bahrain Stock Exchange as the core market for listing and trading of sukuks.

The BMA is encouraging the local banks and private institutions (in and outside Bahrain) to issue sukuks or bonds. 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.