Bahrain Mirror (Reuters): Bahrain is in talks with banks about potentially issuing an international bond this year, three sources aware of the matter said on Thursday, as the Gulf country seeks to raise funds to cover a budget deficit created by cheap oil.

The kingdom could raise as much as $2 billion from the issue, and was considering bonds in 10-year tranches and 30 years duration, according to one of the sources, a Gulf-based banker.

The small energy exporter, with less generous oil and financial reserves than its neighbours, has been hit hard by the drop of oil prices, which reached their lowest levels in 6-1/2 years in August.

Bahrain sent an invitation to a group of local and international banks a few days ago, and banks are waiting for a decision from the kingdom on which lenders will handle the sale, according to the sources, who spoke on condition of anonymity as the information is not public.

Calls and emails seeking comment from the central bank of Bahrain went unanswered.

A bond sale this year from Bahrain will depend on market conditions, the sources said, adding that it may be pushed to 2016 if markets were not conducive.

Issuance from Gulf borrowers has been minimal in the last three months as market volatility has been high due to concerns about China's economic growth and the impact of the United States commencing monetary tightening as soon as this year, which is expected to result in investors putting less money into emerging markets as they can get better returns in America.

Also hanging over the kingdom is the fact that it is on the last rung of the investment grade scale according to the international ratings agencies. Bank of America-Merrill Lynch said in a Sept. 24 note the country could lose the classification as soon as next year due to fiscal challenges.

Should this happen, a significant number of investors who would normally invest in sovereign debt would not be able to buy the issue because of rules banning investments in 'junk bonds'.

Since oil prices plunged last year, Bahrain has slashed state expenditure and is toying with the idea of removing subsidies on goods including meat, fuel and utilities, which have become increasingly hard for the kingdom to afford.

Reflecting the domestic risks, the five-year Bahrain credit default swaps, used to insure against a debt default, jumped to a three-year high of 295 basis points last week, from 153 basis points in June. They were near 400 bps in late-2011.

Existing Bahraini bonds have also widened in the secondary market in recent months. The prospective yield on its $1.5 billion bond maturing in 2023 has increased around 100 basis points since June to 5.24 percent on Thursday, according to Thomson Reuters data.