MTS launches eurobond, opening long-shuttered primary market; Greece troubles continue

By Christine Van Dusen

Atlanta, June 15 - The sounds of computer keys clacking, phones ringing and traders trading were in large part replaced on Tuesday by the bumblebee hum of the vuvuzelas, buzzing in the background as market-watchers instead turned their attentions to the televised games of the FIFA World Cup.

"The market is doing OK," a London-based trader said. "But to be honest, the market is quiet. Everyone's too busy watching the World Cup."

The main point of interest outside of soccer was the resurrection of the $750 million 10-year eurobond deal from Moscow-based Mobile Telesystems, which was launched to yield 8 5/8%. The issuer had been expected to price the notes last month but delayed the deal due to inclement market conditions.

MTS deal launches

MTS was able to launch the deal on Tuesday in part because of the somewhat kinder climate for Russian corporates, which are experiencing solid earnings, lower bond yields and decreased investor concern about debt burdens.

But the main reason MTS closed its books on Tuesday was because "it was doable," a New York-based market source said.

"They came because they could. They didn't take a punt on it," he said. "I'm sure when they announced the deal they knew it was doable. They did it today simply because they could. And they're willing to pay the freight."

Some issuers may look at funding as a "strategic or opportunistic move," and they won't be willing to "pay up," he said. But others, like MTS, "need the money, so they're not going to quibble over 25 basis points."

Given that the market hasn't seen a significant issue price since May 27 - when Malaysia sold a $1.25 billion sukuk issue due 2015 at par to yield 3.928%, or Treasuries plus 180 bps - this movement from MTS is "a good sign," the New York source said.

"The new issue market has been, in effect, closed for quite some time. The market was reopened with this transaction," he said. "The tone feels a little bit better. Equity markets still obviously have, let's say, helped sentiment a little bit, which is good.

"Credit markets have been slightly better bid as well. So it's definitely not a hot market by any stretch, but at least it's moving in the right direction."

If the positive momentum can continue for a few more days in a row, he said, "we'll start to see some guys slowly dip their toes in again."

Greece woes continue

Tuesday also saw Greece popping up in the news again, this time for a penalty its bonds will be assessed when used as security for European Central Bank funds, a market source said. The penalty was attached after Moody's Investors Service cut the debt-saddled sovereign's status to junk, a move that prompted credit default swaps to increase.

Currently, officials from the ECB, European Union and International Monetary Fund are meeting in Athens to evaluate the sovereign's austerity measures.

Generally, the downgrade hasn't had much impact on emerging market debt, the New York source said.

The downgrade "was priced in. Greece was already trading like a B credit," he said. "The only comment here is why are they (downgrading Greece) now? They should've done this months ago. So I don't think the downgrade means anything. That was completely expected."

The bigger factor, he said, is what will happen to Greece and peripheral sovereigns going forward.

"I think a lot of people don't believe that Greece is on a sustainable debt path," he said. "Most people would tell you they expect Greece to restructure or default at some point. We'll see how that whole story plays out. It's really anybody's guess."

EM weathering storms

With Greece's problems and the continuing economic crisis spreading in Europe, June has so far been a "tough month" for emerging market debt, according to Luz Padilla, emerging markets debt portfolio manager for California-based DoubleLine Capital LP.

Still, EM has seen "valuations continue to remain attractive, with spreads above those of comparably rated securities," she said in a conference call.

Corporates have performed the best on a year-to-date basis, she said. "If you invested at the beginning of the year, it would be up 4¼%, despite what happened in May. In May there were many challenges and headwinds for the asset class. The European debt crisis continues to plague our markets."

Even so, EM has been an improving credit story with strong fundamentals and reserves twice those maintained in developed countries. "Emerging economies are in a significantly better position" to withstand "global shocks," she said.

And there may be a few in the second half of this year. Several peripheral countries "still have to do a significant amount of debt refinancing," she said, pointing to Ireland, Portugal and Spain. "We're starting to see Spanish blue chip corporates and banks being shut out of the market and experiencing funding and refinancing issues, and we expect that could continue into the second half of the year."

Germany could also pose a challenge, she said, as could the continuing budget cuts in the eurozone and the resulting civil unrest.

But despite all this, Padilla said, "we expect default rates" in emerging markets "will decrease significantly in the next 12 months."

Venezuela on downswing

One issuer that has seen its position deteriorate, however, is Venezuela. The sovereign was "one of the worst performing countries in May, down 15¼%," she said. And now that the government has taken steps to curb its currency's depreciation by trading it in a band of 4.2 to 5.4 versus the dollar, there's been an effective shut-down of currency operations.

"They've basically shut down the trade going on in that country," she said. "Even with the bounce-back seen this month, we haven't seen that particular country come back strongly."

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