VTB Bank sells notes as investors stay out of the fray; bond funds see continued outflows

By Christine Van Dusen

Atlanta, Dec. 10 - Russia's VTB Bank brought the only new deal from the emerging markets on a Friday marked by the continued rise of Treasury yields, some better data out of the United States and China and a reluctance by investors to come off the sidelines.

The current lack of supply managed to benefit at least one recent issue - the $500 million 5½% notes that priced Thursday from Development Bank of Kazakhstan, which saw its price bump up on Friday.

This came against the backdrop of higher export numbers for the United States and a boost in imports for China, which also raised its reserve requirement again for banks. Also impacting the picture were the austerity measures in the United Kingdom, which cast a small shadow over the markets.

Overall, "EM assets struggled to gain any real direction this week, as liquidity is slowly thinning and recent better news flow has fueled new headwinds in the form of rising U.S. Treasury yields and a stronger dollar bias, stalling risk asset rally momentum," according to an RBC Capital Markets report.

Said Luz Padilla, portfolio manager for the DoubleLine Emerging Markets Fixed Income Fund: "It's quiet. People are just kind of shutting down going into year-end mode. We're not seeing a lot of new deals. It's certainly a lot slower.

"I think also, given what's happened with rates, people are just trying to protect their year-to-date gains and are not really doing much of anything at this point."

VTB prints notes

The new RMB 1 billion notes due Dec. 23, 2013 from Russia-based lender VTB Bank priced at par to yield 2.95%, an informed market source said.

HSBC and VTB Capital were the bookrunners for the Regulation S-only deal, which was talked to yield 2.95%.

Meanwhile, the $500 million 5½% notes from Development Bank of Kazakhstan - which had priced at 99.055 to yield 5.72% - were seen on Friday at 100.15 bid, 100.30 offered, a London-based trader said.

"They're finally free to trade in the market after some sort of delay this morning," he said.

The deal was six times oversubscribed, due in part to a lack of competition on the supply front, but challenged by the fact that investors have been sitting it out in order to protect the gains they've made so far this year.

"Impressive performance," the London trader said. "We've seen some good two-way interest so far."

Some secondary market action

There was also some trading activity among issues from the Middle East and Africa, the trader said.

"It's firm but quiet, as we've come to expect on a Friday," he said.

Abu Dhabi's 5½% notes due 2012 were seen at 106.75 bid, 107.05 offered, while the sovereign's 5½% notes due 2014 were trading at 110.00 bid, 110.25 offered. And the 6¼% 2019 notes were seen at 116.80 bid, 117.20 offered.

The 8¾% notes due 2014 from African Export-Import Bank closed at 112.40 bid, 112.46 offered, while Bahrain's 5½% notes due 2020 were seen at 101.75 bid, 102.05 offered.

Also on Friday, the 6 3/8% notes due 2016 from Dubai Electricity and Water Authority that priced in October at par to yield Treasuries plus 522.1 bps closed at 96.75 bid, 97.25 offered. The second tranche of that same deal - 7 3/8% notes due 2020 that priced at par to yield Treasuries plus 493.2 bps - ended Friday at 93.65 bid, 94.15 offered.

The 3 3/8% notes due 2016 from Qatar-based telecommunications company Qtel International Finance Ltd. - which priced at 100.15 to yield Treasuries plus 219 bps in October - closed at 96 bid, 96.75 offered. The 5% notes due 2025 that priced at 98.96 to yield 5.1% ended the day at 91 bid, 91.75 offered.

And the 3% notes due 2015 that Saudi Arabia-based petrochemical company Sabic sold at 99.357 to yield mid-swaps plus 165 bps in October closed at 99.15 bid, 99.65 offered.

Brazil corporates in focus

Market-watchers were also keeping tabs on Brazil on Friday following the recent new issues from water and sewage services provider Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) and telecommunications company Telemar Norte Leste SA.

Sabesp on Thursday priced $350 million 6¼% notes due 2020 at 99.086 to yield 6 3/8%.

That same day Telemar priced €750 million 5 1/8% notes due Dec. 15, 2017 at 99.828 to yield mid-swaps plus 240 bps.

The two deals are expected to be the last from Brazilian corporates until 2011, given that borrowing costs are rising, a Brazil-based market source said.

"It's also due to a lack of liquidity and volatility on Treasuries," he said.

Sabesp, he said, "has been well demanded by retail accounts while Telemar has been very quiet, though they're having flippers and a lack of buyers on it."

Outflows continue

In other news, emerging markets bond funds saw outflows for the week ended Dec. 8, according to a report from data tracker EPFR Global.

This was the first three-week outflow streak since the first quarter of 2009.

"The outflows from emerging markets bond funds again centered on those funds with hard currency mandates as investors contemplated the prospect of seeing returns pared by the dollar's depreciation," the report said.

"When it comes to geographical allocation, investors continue to gravitate toward funds with an Asia focus."

2011 could be volatile

Next week should see some activity, the trader said.

"We're expecting a few more days of action next week before we basically put a line through 2010," he said.

Looking ahead to the new year, RBC remains bullish on EM assets, according to its report.

"We expect the asset class to continue attracting significant tactical and strategic foreign capital - new money inflows will remain a key driver of returns - drawn to still broadly solid credit fundamentals, wide but narrowing growth outperformance and large interest rate advantages," RBC said. "However, we would caution that EM gains are unlikely to be one-way trending, and it is likely to be another volatile year."

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