Bahrain is the next distressed-debt target: US hedge fund

Greylock Capital Management, a hedge fund that holds the distressed bonds of Mozambique and Venezuela, says Bahrain is its next potential target.

The cash-strapped Gulf nation has been slow to implement reforms compared with its richer neighbors, including Saudi Arabia, after the slide in oil prices that began in 2014 eroded their wealth.

Bahrain will have to revive its financial fortunes to prevent its debt from slumping to distressed levels, according to Bashar Zakaria at the California Public Employees’ Retirement System, the largest US pension fund.

“There’s been a lot of chatter around some of their fiscal stresses,” said Hans Humes, the chief executive officer of New York-based Greylock Capital Management, which specializes in emerging-markets distressed debt.

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The central bank’s foreign assets dropped in March to the lowest level in seven months and the International Monetary Fund expects the island kingdom’s debt to exceed 100 percent of economic output in 2019. Bahrain has enough net foreign assets to last it for up to three years, fueling concerns it may struggle to keep its currency’s peg to the dollar, according to Bloomberg Economics.

Still, Central Bank Governor Rasheed Al-Maraj said last week the country has enough foreign reserves to maintain the currency’s peg, as a recovery in oil prices help ease pressure on its public finances. In addition to spending cuts and the reduction of subsidies, Bahrain will impose a value-added tax next year to help generate revenue, he said, following Saudi Arabia and the United Arab Emirates.

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Bahrain’s dollar-denominated bonds plummeted this year, with the debt maturing in 2029 touching 87.2 cents on the dollar. The cost to insure Bahrain’s bonds against a default for five years climbed last week to 361 basis points, the highest since 2016, based on credit-default swaps.

Bahrain, the Gulf’s smallest economy, has been relying on debt sales to finance budget and current-account deficits. It scrapped an offering in March after investors sought higher yields, but raised $1 billion from Islamic securities. The nation’s debt is rated junk by the three major rating companies.

 

Source Credit: Arabian Business

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