'Subdued' session for emerging markets assets; investors hotly anticipate Bahrain notes

By Christine Van Dusen

Atlanta, June 26 - Bahrain's upcoming issue of $1.25 billion 10-year notes was top-of-mind for emerging markets investors on a Tuesday that was calm despite the news that Greece formally applied for bailout funds and that 28 Spanish banks were downgraded.

"The subdued market reaction to these stories suggests that investors are anxiously waiting for the E.U. summit on June 28 and 29," according to a report from Barclays Capital Markets. "We believe the E.U. summit will yield more strong rhetoric in support of a roadmap toward tighter fiscal integration rather than the endpoint itself."

But given that there is uncertainty about the outcome of the summit, "investors will likely remain reluctant to make strong directional calls," Barclays said.

The Markit iTraxx SovX index spread was unchanged on Tuesday, while the corporate-focused LUCI Crossover index spread was 8½ basis points wider.

Flows were active for many Middle Eastern bonds, including those from Abu Dhabi-based International Petroleum Investment Co. (IPIC), Dubai's Jebel Ali Free Zone (Jafza) and Abu Dhabi National Energy Co. (TAQA).

"I do think there are some pockets of value out there, but the size of these pockets is starting to resemble an old fob pocket," a London-based trader said.

In other news, Dubai-based Majid Al-Futtaim and Hong Kong-based Cheung Kong Holdings took steps toward bringing new deals to the market.

Bahrain sets price talk

For its anticipated deal, Bahrain set the tenor at 10 years and price talk at mid-swaps plus 462.5 bps, a market source said.

Standard Chartered, JPMorgan, Gulf International Bank and Citigroup are the bookrunners for the Rule 144A and Regulation S deal.

The BBB-rated notes are expected to price on Thursday.

"You can read the rating reports or the research as much as you'd like, but as with everything in the region it's all about the technicals," a London-based trader said. "Bahrain is still a little misunderstood, I think. Granted, the media images over the last 12 to 18 months haven't been great, but this credit has very strong Saudi and U.S. ties."

Bahrain should see demand

If Bahrain's previous issue - dollar sukuk due 2018 - offers any indication, this new deal ought to be well received, the London trader said.

"Those with memories back to when that deal was issued will remember the stunning performance, where it rallied to 104 within four weeks after being issued at par and then went to 108 about 3½ months later," he said.

Those 2018 notes sold off a bit on Tuesday morning. "But it is well sought after today," he said during the afternoon. "It feels like there's good secondary demand on Bahrain's 2018s and 2020s."

"Local institutions are flush with liquidity, and even though [the new issue] is not a sukuk, it will be Rule 144A, and there aren't many sovereign bonds in the region offering a 6% handle, yield-wise," he said.

EM sovereigns in focus

As compared to similarly rated emerging markets sovereign issues, the new Bahrain deal is appealing, the London trader said.

Lithuania's 2022 bonds are at z-spread plus 330 bps, while Latvia's 2021 bonds are at z-spread plus 355 bps.

"The new Bahrain notes are flat-ish to Romania's 2022s, at z-spread plus 464 bps," he said. "Regionally, it's trickier to find comparable sovereigns."

He took a look at Bahrain versus Dubai and saw that Bahrain's 2020 bonds are yielding 5.55% while Dubai's 2020 bonds are yielding 5%. Bahrain's 2018 bonds yield 4¾% while Dubai's 2017 bonds yield 4%. The new 2022 bonds from Bahrain carry about a 6% yield, while Dubai's 2022 sukuk carries a 5% yield.

"What that highlights is how the massive squeeze on the Dubai sukuks throw out the normal process of valuation," he said.

On the month, Dubai's 2017 and 2022 bonds were 60 bps tighter.

"That reflects the almost-safe haven status of Dubai at the moment, the power of the sukuk, the flow from the redemptions that was well telegraphed and a very painful repo market for the shorts," he said. "Still seeing better local buying."

IPIC, others active

In trading on Tuesday, activity picked up for bonds from IPIC, Jafza, TAQA, Dar al-Arkan and Mubadala.

"There's the usual retail investor action on the side," a trader said. "A significant squeeze is going on in Mubadala. The 2019s are off to the moon and for the high-dollar players they are making Qtel International's 2019s look like a very good value."

Jafza's 2019 notes were 15 bps tighter, trading at a fresh high of 105.375 after pricing on June 12 at par.

Dar al-Arkan's 2015 notes were 12 bps tighter, at 105 on the bid side. IPIC's 2022 bonds were 6 bps tighter.

In other trading, South Africa's sovereign bonds were lifted into the close. Also, buyers were seen for corporate issuer Eskom Holdings.

Al-Futtaim, Cheung Kong deals

In deal-related news, Majid Al-Futtaim set the size at between $350 million to $500 million for its planned bonds via JPMorgan, National Bank of Abu Dhabi, Barclays Capital, Standard Chartered and UBS.

A marketing trip began Monday.

Development conglomerate Cheung Kong Holdings is planning a Hong Kong dollar-denominated issue of perpetual notes, a market source said.

The notes are to be distributed under Regulation S.

Georgian Railway launches

JSC Georgian Railway (/BB-/BB-) launched a $500 million senior unsecured bond offering due July 11, 2022 to yield 7¾%, according to a market source.

The Regulation S and Rule 144A deal is coming via Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan.

Tbilisi, Georgia-based Georgian Railway is the sole operator of railways in Georgia.

Aleesia Forni contributed to this article.

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