Bahrain is working with banks about a potential re-tap of a dollar-denominated two-part bond issued late last year, sources with knowledge of the deal told Reuters.

The finances of the small energy exporter, with less generous oil and financial reserves than its neighbours, have been hard hit by the drop in oil prices, which touched a 12-year low earlier this month.

The kingdom is working with the same five banks which arranged its $1.5 billion bond in November, which was split between five- and 10-year portions paying 5.875 percent and 7.0 percent respectively, according to three sources with knowledge of the matter.

Any potential re-tap could happen within the next two to three months, one of the sources added.

Bahrain's central bank, which organises the kingdom's borrowing, didn't respond to a request for comment. The sources spoke on condition of anonymity as the information is private.

Under a tap transaction, a 'new' deal is issued which is, in effect, a copy of an existing bond with the same terms and conditions. However, the pricing is usually adjusted to reflect the market performance between the issuances.

Taps are rare in the Middle East, with only a handful in recent years, but the structure would have benefits for Bahrain, mostly due to the speed at which the kingdom could access the market instead of waiting for new documentation to be drawn up for a separate issue.

This could potentially save the kingdom from paying much higher interest rates, as a combination of significant issuance this year by other Gulf entities squeezes available liquidity and markets weigh the risk of an eventual U.S. interest rate rise.

Gulf governments look set to borrow from the international bond market at a record pace this year as they cover budget deficits -- which are expected to near $140 billion, or 11 percent of gross domestic product.

Qatar is talking to potential arrangers of a first sovereign sukuk in nearly four years, sources told Reuters earlier this week, and Sharjah, one of the seven United Arab Emirates, sold a $500 million Islamic bond in January.

With the kingdom on the last rung of investment grade according to international credit-rating agencies, any further downgrade would put its debt into junk status, ruling it out for some international investors and pushing up borrowing costs further.

Bank ABC, BNP Paribas, Citigroup, HSBC and JP Morgan arranged last year's transaction and are working again with the kingdom.