Oman was downgraded to junk status by ratings major S&P on May 12. This makes it the the second nation from the Gulf region, after Bahrain, to see its credit rating slashed below investment-grade. Bahrain was also accorded junk status by the three major credit rating agencies last year.
A credit rating downgrade makes issuing bonds expensive, even more so for junk bonds, as investors demand a higher yield to compensate for the increased risk they are taking. In case a borrower decides to go ahead with the issuance, the increased yield puts further pressure on its finances.
However, in this sense, Oman has been somewhat lucky.
Borrowing for the year
Oman had issued international bonds amounting to $5 billion across three maturities in March this year. The 5, 10 and 30-year bonds issued formed over 90% of the country’s borrowing requirement for the year and was over twice the size anticipated.
Even though Oman is not one of the most robust economies of the Middle East currently, the order book for the issue had stood at $20 billion, showing strong demand for high yielding bonds.
It is important to note here that many investors had an inkling regarding the pending rating downgrade, so that would have been priced-in to a certain extent.
As far as sustained demand for bonds of countries rated as junk is concerned, Oman is not an outlier.
Sri Lanka and Mongolia, in the past two years, have found solid demand for their bonds in the Asian market even after being rated below investment-grade. The former was in the news recently as well for sales of a 10-year bond for $1.5 billion with an initial guidance of 6.625%.
The high yields on these bonds have found several takers among international investors who have had a considerable appetite for emerging market bonds this year.
However, the way forward for low rated frontier market countries may be difficult, especially for countries like Oman, should oil prices remain low. Any untoward macroeconomic event will quickly dry up demand for high yielding bonds.
For Oman, many speculate as to whether the credit downgrade will have an impact on its bond issuing program, and what the country has been doing to improve its macroeconomic picture. Let’s look at these aspects in the next article.