By Davide Barbuscia
DUBAI, July 24 (Reuters) - The government of Oman has hired banks ahead of a planned issue of U.S. dollar bonds, its first this year, as the junk-rated country seeks to cover its budgetary needs.
The transaction comes hot on the heels of a rating affirmation by Fitch earlier this week and improved government deficit figures, boosted by a jump in revenues.
Oman is poised to take advantage of positive conditions in the regional debt markets, despite heightened geopolitical tensions in the Gulf, where the United States says Iran and its proxies have carried out tanker attacks.
The Sultanate's ministry of finance has mandated Citi, JPMorgan and Standard Chartered as coordinators for the potential deal, a document by one of the banks leading the deal showed.
The senior unsecured bonds will be split into a tranche slightly longer than five years and another tranche of 10 years.
Oman is likely to raise around $2 billion with its new bonds, sources previously told Reuters, out of total funding requirements for the year previously estimated to be more than $6 billion.
The small Gulf oil producer - bruised by a slump in energy prices over the past few years - published encouraging deficit figures late last week, giving some respite to its debt investors.
Its state deficit in the first five months of this year amounted to 358.4 million Omani rials ($931 million), a 67% reduction on an annual basis, and the smallest fiscal shortfall for the country for similar periods since 2014.
But Oman's finances remain extremely dependent on oil prices and on crude production, with the hydrocarbon sector accounting for 35.5% of GDP last year.
A change in oil prices of $5 per barrel could change the fiscal deficit by around 2% of GDP, all else equal, Fitch said this week.
While not at risk of a credit crunch, Oman has been downgraded to junk by all major credit rating agencies, becoming the weakest debt market link among Gulf Arab oil exporters.
Oman's international debt, however, "has been one of the best performing" in the Gulf Cooperation Council this year, said Aarthi Chandrasekaran, portfolio manager at Shuaa Capital.
"It was penalized very harshly by investors at the end of last year when the market was pricing it as a single B credit, which was not warranted," she added.
Oman's $2.5 billion 2028 bonds, issued in January last year, were yielding 5.8% on Wednesday, Eikon Refinitiv data showed, down from a 7.6% yield at the beginning of the year.
Given the expected size of the issuance, smaller than some of Oman's previous bonds, the new deal could offer a relatively small discount to its existing debt curve, fund managers said.
One of them estimated Oman might offer 300 basis points over U.S. Treasuries for the long five-year tranche, and 400 bps over the same benchmark for the 10-year paper.
The three coordinating banks for the transaction have also been hired as joint bookrunners along with First Abu Dhabi Bank, MUFG, Natixis, and Societe Generale, the document said. ($1 = 0.3850 Omani rials) (Reporting by Davide Barbuscia Editing by Deepa Babington and Keith Weir)