EM investors remain skittish even after Greece agreement; Cemex cancels; inflows grow

By Christine Van Dusen

Atlanta, June 24 - Though risk assets saw some gains on Friday morning after Greece reached an agreement with European officials on the sovereign's austerity program, the picture worsened as the day went on, with no action in the primary market and weaker trading for the new issue of notes from Russia-focused VimpelCom Holdings BV.

"Although it remains unclear whether the Greek opposition will support the austerity package, it seems likely now that parliament will pass the necessary legislation next week, paving the way for additional support from the E.U.," according to a report from RBC Capital Markets.

Still, investors remained worried about the situation in Greece, and those fears couldn't be mitigated by better data from the United States. The volatility led Mexico's Cemex SAB de CV to shelve its plans for a new issue.

"It's all very quiet here. The world is either on holiday or worried about Greece," a London-based market source said. "Even the better numbers in the U.S. today did nothing to help."

Said a trader: "The market was hit hard, particularly in the afternoon as liquidity dried up and bids disappeared. Spreads were generally 5 to 10 bps wider, capping off a poor week for the market. While there remain pockets of outperformance, for the most part the market was beaten up. It was easily the heaviest session since the start of the year."

Cemex shelves plans

Mexico-based building materials supplier and cement producer Cemex has canceled plans for a $650 million issue of notes due 2019 as a result of current market conditions, a market source said.

Bank of America Merrill Lynch and HSBC were the bookrunners for the Rule 144A and Regulation S notes, which were non-callable for four years and included a change-of-control put at 101%.

Proceeds were to be used for general corporate purposes, including repayment of debt.

The notes were talked at the 9½% area.

VimpelCom in focus

Traders were paying particular attention to the $2.2 billion notes due 2014, 2017 and 2022 from Netherlands-based mobile phone service provider VimpelCom Holdings.

The issue included $200 million floating-rate notes due June 29, 2014 - a late addition to the deal - that priced at par to yield Libor plus 400 bps. The deal also included $500 million 6¼% notes due March 1, 2017 that priced at par. The third tranche was $1.5 billion 7½% notes due March 1, 2022 that priced at par.

The notes faded in trading on Friday, with the 2017s at 99.25 bid, 99.75 offered. The 2022s were seen at 99.25 bid, 99.50 offered.

"VimpelCom placed a very large issue earlier in the week, and even though it was clearly cheap to the sector, it wasn't a success," a London-based market source said. "Lots of clients are telling me that they will keep long of cash until they see calmer conditions."

Selling seen in Middle East

Credits from the Middle East experienced a wave of selling on Friday, a trader said, though sukuks continued to outperform.

"There was drive-by selling going on in Abu Dhabi, where credits were broadly wider by 10 bps," a trader said. "Dubai was being leaned on, with the 2020 notes wider by 10 bps at 105 bid, 105.25 offered."

Kuwait's Kipco was downgraded by Moody's Investors Service on Friday morning, sending spreads 12 bps to 15 bps wider on the company's 2016s and 2020s.

And the Qatar sovereign saw the long end move 5 bps to 10 bps wider.

"I'm still of the view that the Street isn't really positioned how it wants to be," a trader said. "One really has to pick one's entry points and be comfortable with credit and technicals of that specific bond."

HSBC trades up

In other trading from the Middle East, the 2016 dollar notes from HSBC Bank Middle East that priced at par on May 26 were seen at 101.31 bid, 101.56 offered on Friday.

The 2016 dollar notes from United Arab Emirates-based Emirates airlines were trading Friday at 99.60 bid, 99.75 offered after pricing on June 1 at 99.904.

And Abu Dhabi's Aldar Properties, which recently was downgraded two notches by Moody's amid questions about government support, saw its notes widen 40 bps over the week.

"Liquidity is poor and will only get worse," a trader said.

FirstRand active

From Africa, FirstRand Bank Ltd. saw a lot of activity for its 2016 notes, which were trading between 99.75 and par.

"That's pretty much unchanged, spread-wise, on the week, which is impressive," a trader said.

And South Africa was well supported at the sovereign level.

Looking to Turkey, corporates were slightly firmer at the open but susceptible to the market's jitters, a trader said.

"We are buyers of Garanti Bankasi AS' 2021s and sellers of Garanti's 2017s," he said.

Inflows rise

Inflows into emerging markets bond funds totaled $845 million for the week ended June 22, up from $552 million during the previous week, according to data tracker EPFR Global.

About 90% of the inflows went into Europe-domiciled funds and 64% into funds with local currency mandates.

"European institutional investors are playing catch-up with their U.S. peers on this asset class, which continues to decouple in a three-forward-two-back kind of way from developed markets debt cycles," said Cameron Brandt, senior analyst with EPFR.

EM gains favor

Despite all the current volatility, emerging markets assets remain a solid investment choice, and investors are increasingly adding EM exposure to their portfolios, according to Luz Padilla, portfolio manager for the DoubleLine Emerging Markets Fixed Income Fund.

"The line has blurred between emerging and developed market debt," she said during a recent conference call. "The risk of a large portion of the EM universe is lower than that of certain developed markets."

She expects the asset class to continue delivering yields in the low- to mid-6% range.

"Our optimism is based on the strong growth experienced over the last 12 months in every region of EM," she said. "But we believe that some spread premium is warranted at present. We expect spread premiums will continue to shrink and will at some point disappear."

© 2015 Prospect News.
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