Philippines taps bookrunners as risk appetite cautiously resumes; Ivory Coast in focus

By Christine Van Dusen

Atlanta, Jan. 3 - Emerging markets investors returned to the bond markets on Monday with an appreciation for risk as commodity prices rallied, spreads tightened and Treasury yields undulated on news that U.S. manufacturing grew in December.

The day also saw the Ivory Coast's bonds drop due to continued violence. And the Republic of the Philippines mandated bookrunners Citigroup and HSBC for $1.5 billion of 25-year notes.

"It looks like we're off to an auspicious start," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "The risk trade psychology is dominating the start of the year. EM has a good tailwind at this point in time."

With crude oil at about $92 a barrel, soybeans at $14 a bushel and copper at nearly $4.50 a pound, EM corporates - many of which are in the commodities game - in particular were seeing strength on Monday.

Yields on 10-year Treasuries rose to about 3.43% before tapering back to 3.34% after the report that the ISM factory index climbed to 57 from 56.6 in November.

Philippines' notes on tap

Emerging markets debt spreads were about 11 basis points tighter by mid-afternoon.

New issuance, meanwhile, stayed at a standstill as the United Kingdom remained on holiday and issuers eased back to business.

"I think later in the week and into the second week, as we get a better sense of what U.S. Treasuries will do, we may have some interest on the sovereign side," Alvarez said.

Though volumes are starting to come back, and there's a sense that a lot of cash is hanging around, issuers are waiting for more signs of life before bringing new deals.

"We've got to get volumes to really come back, which obviously wound down to a trickle during the holiday period and need their bearings to be set straight," he said. "If there is more interest in the risk trade, then we could see issuance."

When issuance does pick up, the action is likely to focus on long-dated bonds from emerging markets sovereigns and corporates, said Jerry Brewin, head of the emerging market debt portfolio at Aviva Investors.

"I am concerned EM investors will struggle to absorb the new supply," he said.

Among the upcoming deals now on radar screens is the Philippines' planned $1.5 billion 25-year notes, which could price as soon as this week. Citigroup and HSBC have been named as bookrunners, and JPMorgan, Credit Suisse, Deutsche Bank and UBS will also be involved in the transaction.

Market eyes Argentina, Brazil

Spreads in Latin America tightened by as much as 14 bps during the day. Leading the field was usual suspect Argentina, which also saw its GDP warrants up as much as 5% to 6%.

"The warrants are very undervalued and have been performing throughout December, but today it just seems that people are waking up, going into the new year, and obviously picking them up," said Phillip Blackwood, head of emerging markets debt at Sydbank.

Brazil, meanwhile, was not leading the upside despite news that president Dilma Rousseff took office over the weekend and is promising to pursue business-friendly policies.

"The announcement she's made where she's targeting a reduction in government expenditures is something that was awaited by the markets," Alvarez said. "It comes across as very targeted and very positive for the market at a magnitude above what the market expected."

Ivory Coast misses payment

In other sovereign news, the Ivory Coast remained in the headlines as the sovereign missed a payment on the $2.3 billion bond that has come due, though market sources say this does not mean a default is imminent.

The region remains in conflict as defeated president Laurent Gbagbo continues to refuse to step down amid increasing civil unrest. In response, the Ivory Coast's 2032 2½% notes were trading Monday at 39 from a previous level of 43.

The drop is even more significant than it appears, because the previous price of 43 was actually more like 44¼ with the accrued interest, Blackwood said. Now investors are paying 39 without the accrued interest.

"That makes the fall even bigger," he said.

EM could face competition

Meanwhile, market sources continued to keep an eye on debt restructuring in Greece and other euro zone nations.

"The newly restructured debt of fringe Europe will be rated in the single B credit zone, will be high yield, will be serviceable if the market thinks it is. That means the total debt-to-GDP ratio needs to fall and the annual debt servicing needs to be covered by foreign direct investment, new money and official disbursements," Brewin said.

"If all this is a believable debt story, then it clearly competes with our EM universe. Imagine any Greek debt market rated B, yielding 9% and with plausible servicing capability. Then add any of Portugal, Spain and Ireland, plus Italy," he said.

These countries don't qualify for the JPMorgan Emerging Markets Bond Index Global, he said, but will present a new investment universe focused on restructured developed market debt.

"That's a new asset class that will compete with EM," Brewin said. "EM sovereign and corporates will be competing for funds."

© 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.