Emerging markets widens on risk aversion, supply; Dubai sells benchmark; Net Servicos launches

By Christine Van Dusen

Atlanta, Oct. 28 - Emerging markets credit default swap spreads and bond prices widened Wednesday, reflecting a sense of risk aversion and mildly negative sentiment among investors who were still trying to digest the abundance of supply in the market, informed sources said.

"The problem with this week is there is a lot of issuance hitting the market in all regions, in corporate and in sovereign, and most people are focused on analyzing some of the newer issues," the source said.

"That, together with the fact that risk appetite is taking a breather, means the market is getting hit on the back of that."

Five-year credit default swap spreads were wider across the board Wednesday, according to a market source at the European close. Argentina closed the session at 998.82 bps mid, 31.77 bps wider on the session. Brazil closed at 136.39 bps mid, 4.17 bps wider. Gazprom closed at 241.305 bps mid, 4.87 bps wider. Russia's close was 183.6 bps mid, 2.81 bps wider. Mexico's close was 168.65 bps mid, 2.81 bps wider. Venezuela closed at 1,013.92 bps, 27.35 bps wider. And Russia's Veneshtorgbank closed at 340.56 bps mid, 10.68 bps wider.

There also was spread widening and lower prices in bonds, according to Enrique Alvarez, head of research on Latin America for think tank IDEAglobal.

One dramatic example he cited was The Republic of Colombia's new 6 1/8% global notes due January 2041 (Ba1/BBB-/BB+) which priced at 99.597 to yield 6.155% in a $1 billion issue two weeks ago.

Spotting the new Colombia 6 1/8% notes due 2014 at 92¾ bid, 94½ offered on Wednesday, Alvarez remarked that investors have sustained substantial losses since the bond priced.

The Colombia deal may have taken place right at the time the market was turning, Alvarez said, and possibly that transaction helped to steer the then-rallying emerging markets into a turn.

"That deal was too tightly priced," the strategist remarked. "There was not enough spread.

"From that point we seemed to start moving backwards."

Nevertheless, the IDEAglobal strategist pointed out that the dedicated emerging markets bond funds have been on the receiving end of phenomenal amounts of cash over the past two weeks.

The week to Oct. 14 saw inflows of nearly $1 billion - the largest cash infusion ever, according to market sources.

"I don't think that money is necessarily going into the market," Alvarez said. "Managers may be holding off in order to make a judgment as to just what kind of correction we may have."

And the fact that the issuance calendar is so heavy could be seen as a "positive sign," another market source said.

"It wouldn't be as loaded as it is if the syndicate teams out there weren't hearing positive feedback about investor demand. There's no reason this retracement shouldn't follow with a rally, unless an unexpected event happens."

Though Wednesday was expected to be chock full of pricing and other details on new deals, "the timing this week is probably playing against them," another market source said. "The market's been hit with so much paper.

"Maybe this week people are realizing it just can't go on like this. So when deals are coming in, they're not oversubscribed by as much - good demand, but maybe two-times oversubscribed instead of 10. So we can take a signal from that.

"That, together with the bit of weakness in the equity markets, is causing people to kind of take the foot off the pedal."

Dubai prices benchmark sukuk

On Wednesday Dubai DOF Sukuk Ltd. priced a two-part dollar- and dirham-denominated sukuk offering at the tight end of guidance, a market source said.

The $1.25 billion tranche of 6.396% five-year fixed-rate notes due Nov. 3, 2014 priced at a spread of 370 bps to midswaps. Price talk was in the high 300s.

The bookrunners for the Regulation S deal were Dubai Islamic Bank, Mitsubishi UFJ Securities, Standard Chartered Bank and UBS Investment Bank.

The AED 2.5 billion tranche of five-year floating-rate notes due Nov. 3, 2014 priced at a spread of 370 bps to 3-month Euribor. Price talk was also in the high 300s.

The bookrunners were Dubai Islamic Bank, Mitsubishi UFJ Securities, National Bank of Abu Dhabi, Standard Chartered Bank and UBS Investment Bank.

Both issues came at a re-offer price of par.

"The bonds were trading up in the gray market," a source said. "The timing of it could have been better, given that the rest of the market was seeing selling spreads widen."

Net Servicos launches

Also in primary activity Wednesday, Brazil's Net Servicos de Comunicacao launched $350 million of 7½% bonds (expected Ba1/BB+/) due Jan. 27, 2020 at a yield of 7 5/8%, according to a market source.

"The talk was about 7.5% to 7.75%," a buy-side source said. "It's come in reasonably priced."

Citigroup, ING Groep NV and Banco Itau are the bookrunners for the Rule 144A with registration rights and Regulation S offering.

Proceeds will be used for general business purposes, including repayment of existing debt and funding potential acquisitions.

Net Servicos is a cable services provider based in Sao Paolo, Brazil.

Whispers on Lukoil

The market was buzzing Wednesday about Russia's Lukoil and its benchmark dollar-denominated deal to be sold in dual tranches of five-year and 10-year notes for an overall size of $1.5 billion maximum.

Price talk was whispered at 6.5% for the five-year tranche and 7.375% for the 10-year tranche, an informed source confirmed.

Barclays Capital, ING and Royal Bank of Scotland are the bookrunners for the Rule 144A and Regulation S bond offering, which ended its European and U.S. roadshow Wednesday.

Lukoil is a Moscow-based oil and energy company.

Croatia sets initial guidance

The Republic of Croatia set guidance for its planned dollar-denominated benchmark 10-year notes (expected Baa3/BBB/BBB-) at U.S. Treasuries plus 350 bps, according to a market source.

The bookrunners for the Rule 144A and Regulation S deal are Barclays, Citi and JP Morgan.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.