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Ask Your Advisor: De-risking out of Bahrain
Bahrain’s credit ratings outlook was downgraded. Our client asks what should he do?
By Earl Andrew A. Aguirre
Just like soldiers, investors need to regularly assess various risks and consider retreating from investments to avoid potential losses. Take the case with the sovereign bonds of Bahrain.
Bahrain – an island country sandwiched by Saudi Arabia and Qatar – is dependent on oil and gas exports, making its economy sensitive to global oil-price swings. A victim of easing oil prices and the pandemic, Bahrain went from a credit rating of A- in 2011 to B+ at present, effectively losing its investment-grade status.
Last February, a major ratings agency revised its outlook on Bahrain’s long-term foreign currency sovereign bonds to negative, citing weak public finances, rising interest burden, and increasing debt-to-GDP ratio – at 121% in 2023. Despite the news, some investors continue to be hopeful, given that Bahrain is a member of the Gulf Cooperation Council and is expected to receive extraordinary support from other Middle Eastern nations during an emergency.
One of our high-net-worth clients, Larry (not his real name), approached us for recommendations on what to do with his over 20-years long Bahrain bonds that he originally purchased in October 2023. Larry could choose to hold onto these bonds, which pay very attractive coupon rates compared to investment grade names. However, this would continue to expose Larry to all sorts of credit, market, and liquidity risks over the next two decades.
Larry’s Bahrain bonds
SOURCE: Metrobank Treasury Group-Rates and Credits Division
| Security Name | Coupon Rate | Maturity Date | Face Value (USD) | Acquisition Cost | Original Cashout (USD) | Total Earnings if Held To Maturity (USD) | Annualized Return if Held To Maturity |
|---|---|---|---|---|---|---|---|
| BHRAIN 47 | 7.50% | 20-Sep-47 | 200,000.00 | 83.25 | 168,250.00 | 390,315.00 | 9.69% |
| BHRAIN 51 | 6.25% | 25-Jan-51 | 200,000.00 | 84.125 | 171,805.56 | 371,944.44 | 7.94% |
Fortunately, Bahrain bond prices haven’t reacted too negatively to the recent outlook change. If Larry decides to sell to the market, he can still realize gains in both bonds. Note that even though BHRAIN 51’s market price is lower than Larry’s original acquisition cost, he still gained because of the coupons he received.
Still a gain
SOURCE: Metrobank Treasury Group-Rates and Credits Division
| Security Name | Market Price | Sales Proceeds (USD) | Coupons Received (USD) | Sales Proceeds + Coupons (USD) | Realized Gain/(Loss) on Sale (USD) | Holding Period (Years) | Annualized Gain/(Loss) |
|---|---|---|---|---|---|---|---|
| BHRAIN 47 | 98.25 | 203,096.50 | 14,940.00 | 218,036.50 | 49,786.50 | 1.4 | 21.26% |
| BHRAIN 51 | 84 | 169,089.56 | 18,750.00 | 187,839.56 | 16,034.00 | 1.4 | 6.75% |
NOTE: Indicative pricing as of 7 Mar 2025
Since Larry still wants to have Middle East exposure, we recommend reinvesting the proceeds to relatively safer sovereigns Saudi Arabia and Oman. Saudi Arabia remains a solid A+ while Oman recently got upgraded back to an investment grade rating by a major credit rater. It is expected that other rating agencies will follow suit. Compared to Bahrain, both countries are diversifying their revenue streams beyond oil and gas to services and tourism.
Larry’s Gulf options
SOURCE: Metrobank Treasury Group-Rates and Credits Division
| Security Name | Coupon Rate | Maturity Date | Face Value (USD) | Offer Price | Cashout (USD) | Total Earnings if Held To Maturity (USD) | Annualized Return if Held To Maturity |
|---|---|---|---|---|---|---|---|
| OMAN 27NEW | 6.75% | 28-Oct-27 | 200,000.00 | 104.125 | 213,737.50 | 26,604.67 | 4.73% |
| KSA 5.125 28 | 5.13% | 13-Jan-28 | 200,000.00 | 101.375 | 204,901.39 | 25,678.28 | 4.41% |
| OMAN 28 | 5.63% | 17-Jan-28 | 200,000.00 | 101.25 | 204,687.50 | 28,891.50 | 4.94% |
| OMAN 29 | 6.00% | 1-Aug-29 | 200,000.00 | 103 | 207,833.33 | 45,903.33 | 5.03% |
| KSA 4.75 30 | 4.75% | 16-Jan-30 | 200,000.00 | 99.75 | 201,451.39 | 45,757.78 | 4.68% |
NOTE: Indicative pricing as of 7 Mar 2025
And unlike Larry’s extremely long-dated holdings, we prefer to stay within 1 to 5 years given our view of a steeper US Treasury yield curve. Clients who decide to invest in these bonds are not only exposed to lower risk, they may also encounter trading opportunities should front- to belly-yields fall and bond prices appreciate.
For a list of our latest USD bond top picks that may not necessarily include Middle East names, please click here.
Larry is lucky that he is still able to exit his Bahrain bonds at a gain. Others who may have bought the bonds when they were issued at a price of 100.00 may not be so lucky, even after accounting for the coupons received. But even when in the red, we believe that it is prudent for investors to know when to sell an investment in order not to incur even greater losses. After all, an investment is supposed to generate returns for an investor and if it is underperforming, then investors simply need to move on to something else.
Looking to de-risk out of risky issuers or shorten your duration? Please contact your investment specialist to get market quotes and alternative bonds to switch to.
(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)
EARL ANDREW “EA” AGUIRRE is the Head of the Investment Counselor Department under the Financial Markets Sector of Metrobank. He has more than a decade of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.