Banco Cruzeiro prices $250 million bonds; Dar Al-Arkan sukuk disappoints; fund flows eyed

By Paul A. Harris

St. Louis, Feb. 12 - Friday's emerging markets trading session passed quietly, according to a trader in New York, who added that emerging market debt at the close of the week remains in the grip of the volatility that continued to rock capital markets in Europe and the Americas.

Activity was muted by the fact that the United States was headed into the three-day Presidents Day weekend and that the Chinese New Year will be celebrated on Monday and Tuesday of the week ahead.

Asian high-grade debt finished the day 1 to 2 bps tighter, according to the trader, who focuses on Asian credit.

Dar Al-Arkan disappoints

A downsized sukuk deal from a unit of Saudi real estate developer Dar Al-Arkan Real Estate Development Co. went poorly, according to a trader based in Zurich.

The company came to market to raise $1 billion but only managed to cross the finish line with $450 million.

Not only that, but the new Al-Arkan 10¾% sukuk due 2015 (Ba2/BB), which priced at 99.058, was trading below issue price heading into the European close at 98¾ bid, 99 offered, the trader said.

Deutsche Bank Securities, Goldman Sachs & Co. and Unicorn Investment led the sale of notes, which was conducted according to Rule 144A and Regulation S.

Proceeds will be used to fund future development projects.

Cruzeiro sells $250 million

Elsewhere on the new issue front on Friday, Brazil's Banco Cruzeiro do Sul SA priced a $250 million issue of five-year fixed-rate global bonds (Ba2) at 99.007.

BCP Securities LLC and BTG Pactual were the bookrunners for the issue that was placed under Rule 144A and Regulation S.

Out of junk, into EM

Investors are shifting money out of high-yield corporate bonds and into emerging markets debt, according to a trader in Europe.

Recent fund flow numbers bear out this assertion.

AMG Data Services reported that high-yield mutual funds saw $984 million of outflows during the week to Feb. 10 - the largest weekly outflow that asset class has seen since September 2005, according to a market source.

However, EPFR Global reported that dedicated emerging markets bonds funds - including those devoted to the dollar-denominated trade, as well as those that play local currencies - saw $700 million of inflows during roughly the same time period (AMG reports that dollar-only EM funds actually saw $100 million of outflows during the week to Feb. 10, according to a market source).

"People are getting out of risk, and they are being more cautious about new issues," the trader said.

"They're shifting from high yield into EM because everybody believes that EM is safer. I personally don't believe it," the trader added.

Lithuania remains resilient

Some emerging markets debt has demonstrated notable resilience in the face of the volatility that has taken hold in the European sovereign sector.

For example, Republic of Lithuania's recent notes, issued late last year and early this year, remain solidly above issue prices.

Lithuania's 7 3/8% global bonds due 2020, which priced at 98.273 to yield 7 5/8% in a $2 billion issue on Feb. 4, are now quoted at 100½ bid, 102 offered.

And the Lithuania 6¾% fixed-rate notes due Jan. 15, 2015, which priced at 99.744 in October 2009, are quoted at 102¾ bid, 103 offered.

Also high-grade credit-default swaps were tighter on the day heading into the European close and also tighter on the week.

Brazil's five-year CDS were 141 bps mid, 5 bps tighter on the day and 6 bps tighter on the week.

Mexico's five-year CDS were 142 bps mid, 5 bps tighter on the day and 8 bps tighter on the week.

And Russia's five-year CDS were 191 bps mid, 5 bps tighter on the day and 17 bps tighter on the week.

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