Greece contagion leaves emerging markets weaker; Argentina bonds in peril; Fantasia prices

By Christine Van Dusen

Atlanta, May 5 - Greece's infectious financial problems just wouldn't go away on Wednesday, and emerging markets felt the sting - the tone was softer, trading was weaker, inflows were slower and the primary was nearly dead-quiet, market sources said.

"There's a streak of weakness overall," said Enrique Alvarez, debt strategist with think tank IDEAglobal.

"There's definitely light volume," a New York-based market source said. "Brazil and Mexico are going pretty well, all things considered."

Prices for those sovereigns on Wednesday afternoon were "down about a quarter to a half point and spreads are 5 to 7 basis points wider on the day," he said. "But those are pretty muted moves, considering how other countries are moving in other parts of the world. And a lot of the spread moves are due to the Treasury rally."

The market is seeing "a little bit of selling, but it's not like the wholesale type of selling we saw a year ago," he said. "Some guys are taking chips off the table. The problem is valuations are still pretty tight, pretty stretched, and I don't really see more than trading types adding. I don't think most guys are adding here when they can buy other products a lot cheaper."

Overall, "we're kind of pretty much subject to global moves right now," he said. "We're at the whim of other markets."

Venezuela, Argentina under pressure

The names that were feeling the most pressure on Wednesday were Venezuela and Argentina, Alvarez said.

Venezuela's benchmark 2027 bond was bid at "76¼ today, off 1¾ [points] on the day and wider by 42 basis points," Alvarez said. "On April 26, it was 82 1/8 and trading at a 700 [bps] spread. So it's approximately 6 points lower. That's significant, too."

But it's not as significant as what's happening with trading on Argentina, he said, because "Venezuela is not undergoing any sort of restructuring offer," he said. "It's just trading as any other high-beta instrument in EM and obviously taking a lot of punishment here off the waves coming from Europe."

In Argentina, the discount bond was trading Wednesday at "71¼ bid, off about 1 3/8 points on the day," he said. "But it was 76¼ last Monday, so that's a very sharp fall. The spreads have widened. It's at 744 basis points today, so the difference is nearly 100 basis points.

"That's a very significant margin for Argentina, especially now that they're going through the offering process for the holdouts."

Argentina bonds at risk

As far as the restructuring goes, Argentina launched its debt exchange - which offers a second exchange opportunity to bondholders who didn't participate in a 2005 swap - on Friday. On Monday Argentina gave investors from the United States and Europe a chance to submit bonds. Investors in Japan will do the same this coming Friday.

The sovereign is aiming for 60% participation in the swap.

"The key to making this successful are the retail investors, who are based mostly in Italy," Alvarez said. "Since they've held the bond for eight or nine years without getting paid anything, and the legal recourse is going nowhere, I think they're going to be very willing, more so than before, to tender their bonds and exchange."

So the swap itself isn't at risk, Alvarez said. It's the $1 billion in seven-year bonds, which Argentina wants to issue as part of the restructuring, which could be in danger.

"As Greece and Portugal continue to slide down this slope into the abyss, the real problem is where will you generate demand for new high-beta paper in that environment? That's the real question ahead, the real unknown," he said. "We really don't have assurances that they're going to have sufficient demand to fund that paper."

Inflows slow, primary quiet

While inflows into emerging markets bond funds "remained positive" on Wednesday with $420 million, "from a pure flows perspective the amount being committed to EM bond funds has slowed in recent days," said Cameron Brandt, global senior analyst for data tracker EPFR Global.

And the primary on Wednesday was nearly silent. One issuer even postponed its deal.

India's Essar Steel Holdings Ltd., which had planned an offering of dollar-denominated seven-year senior notes, is delaying the deal because of investor concern about the company's plan for the proceeds and also due to the crisis in Europe.

The deal could come back to the market within six months, pending Essar Steel's performance in the meantime, a market source said.

"If they're postponing in a country where the overlying sovereign still generates demand, then anyone else looking to issue now won't venture in," Alvarez said. "It would be a pretty risky proposition to come to market. [Issuers are] going to wait. And the wind is at their back, because Treasury yields are dropping."

That said, one issuer did bring a deal to market on Wednesday. Hong Kong's Fantasia Holdings Group priced $120 million 14% notes due 2015 at 98.264 to yield 14½%, according to a market source. The deal was talked earlier in the day at 14½%.

Citigroup Global Markets, Merrill Lynch International and UBS AG were the bookrunners for Fantasia's Rule 144A and Regulation S deal, which is non-callable for three years.

Proceeds will be used for general corporate purposes and to fund property projects.

Lippo prices notes at par

Indonesia's Lippo Karawaci, through subsidiary Sigma Capital Pte. Ltd., priced $81.65 million senior notes due 2015 at par to yield 9%, according to a company announcement.

Citigroup Global Markets Singapore and Deutsche Bank (Singapore branch) were the bookrunners for the Regulation S deal.

An additional $188.96 million was issued in exchange for the company's existing 8 7/8% notes due 2011.

Lippo Karawaci is a property developer.

Essar Steel postpones

India's Essar Steel Holdings postponed its benchmark offering of dollar-denominated seven-year senior unsecured notes (B2/B), an informed source said on Wednesday.

Investors were concerned about the company's performance, given the use of proceeds, which included capital expenditures and acquisitions.

The deal was also impeded by fallout from the unfolding crisis in Europe, which centers on the distressed sovereign debt of Greece, the source said.

The deal could come back to the market within six months, pending Essar Steel's performance in the interim, the source added.

Bank of America Merrill Lynch, Deutsche Bank Securities and Standard Chartered Bank were joint bookrunners.

In addition to capital expenditures and acquisitions, the Mumbai, India-based vertically integrated global steel producer intended to use some proceeds from the bond deal to repay debt and for general corporate purposes.

Paul A. Harris contributed to this report

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