Bahrain Issues US$1bn Sukuk Ijara in the International Market in September 2020 to Further Mitigate the Impact of COVID-19 on Public Finances

The Kingdom of Bahrain, acting through the Ministry of Finance & National Economy, returned to the international market in September 2020 with a benchmark 7-year US$1 billion Sukuk issuance which matures on 16 September 2027.

The Sukuk Certificates, rated B+ by Fitch Ratings, were issued by CBB International Sukuk Programme Company S.P.C., a single person company incorporated in the Kingdom of Bahrain with limited liability whose proprietor is the Central Bank of Bahrain (CBB), under its Trust Certificate Issuance Programme, established in 2019 but updated on 8 September 2020.

In issuing Ijara Sukuk, the Government of Bahrain sells an asset to the investors, who will buy and own it before renting back to the Government at a predetermined rental rate, via a rental contract. The Government will also issue a binding promise to buy back the asset at its par value at the end of the rental period.

The latest US$1 billion transaction was priced at a profit rate of 3.950% per annum and is listed on the Irish Stock Exchange (Euronext Dublin). The transaction was arranged by Bank ABC, Citigroup, Gulf International Bank, HSBC,  National Bank of Bahrain and  Standard Chartered.

Bahrain has been hit by the economic and social impact of the COVID-19 pandemic perhaps more so than other Gulf Cooperation Council (GCC) states because of its limited recourse to revenues. As a result, on 24 August 2020, pursuant to Decree Law № 27 of 2020, the Bahraini Government raised the debt ceiling from BD13,000 million (US$34,474.93 million) to BD 15,000 million (US$39,778.77 million).

In July 2020, Decree № 22 for the year 2020 was issued, which authorised emergency expenditures of BD177 million to fund the Government’s efforts to combat COVID-19. In addition, Decree № 23 for the year 2020 was issued to permit the Government to withdraw US$450 million from the Future Generations Fund on a one-time basis to support the 2020 State Budget and temporarily halt the allocation of oil revenues to the Future Generations Fund in 2020.

Fitch Ratings in September 2020 downgraded Bahrain’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-‘. Banks such as Bank ABC, the largest bank in the country and one of the largest in the MENA region, stress the the rating downgrade “will not lead to imminent pressure on the Bank’s funding or pricing, due to its resilient balance sheet position and consistent growth strategy.”

As at 30 June 2020, Bahrain’s total outstanding debt (comprising its total external debt and its total domestic debt but excluding debt of the government related entities) amounted to US$37,476.1 million, which is 114.9% of GDP, compared with US$36,076.9 million at end 2019 (93.5% of GDP). Of this, US$14,355.1 million was denominated in Bahraini dinars whilst the Kingdom’s total outstanding external debt totalled US$23,141 million, which is 70.9% of GDP – up from US$21,741.8 million (56.4%) at end 2019. These include six international Sukuk issuances outstanding totalling US$5,350 million, including the September US$1 billion issuance. 

According to Ministry of Finance data, the majority of the Government’s external debt as at 30 June 2020 was denominated in GCC currencies used for Bahrain’s Fiscal Balance Programme and in US Dollars. The current average maturity of the external debt is approximately 10 years.

The kingdom’s total domestic debt stood at US$14,335.1 million (eq) at end June 2020, of which outstanding 6-month Sukuk Al Ijarah accounted for US$2,210.1 million and 3-month Al Salam Islamic securities for US$343.1 million. In fact, in September the Central Bank of Bahrain issued BD26 million of Al Salam Sukuk and BD46 million of Sukuk Ijara as part of its regular monthly issuances aimed at facilitating the short-term liquidity management requirements of Bahraini-based Islamic financial institutions.

The Central Bank of Bahrain, on behalf of the Government of Bahrain, is a regular monthly issuer of domestic Sukuk. Its first foray into the short-term Al Salam Sukuk and international Sukuk Ijara market was in 2001, followed by its short-term domestic Sukuk Ijara issuances from 2005.

According to the Central Bank of Bahrain, the number of Islamic banking licences has remained relatively stable for the past seven years and, as at 30 June 2020, there were a total of 20 Islamic banking licenses, of which six were held by retail banks and 14 were held by wholesale banks.

As at 30 June 2020, Islamic banks’ assets accounted for 15.4% of total banking sector assets. The aggregate total assets of Islamic banks comprised of unrestricted investments stood at US$32,498.7 million and restricted investment accounts (which are off balance sheet items) amounted to US$2,110.6 million.

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