Fibria, Russian Agricultural Bank plan notes as Middle East tensions work to idle markets

By Christine Van Dusen

Atlanta, Feb. 28 - Ongoing violence in Libya continued to cast a long shadow over emerging markets assets on Monday - pumping up oil prices, thinning volumes and hampering new issuance.

"The usual light Monday morning volumes, combined with the continued lack of a new issue calendar, have the credit markets at a near standstill, but still with a somewhat positive yet cautious tone," a New York-based trader said. "There's lots of U.S. data on tap for this week, which could push rates around to provide some direction to our markets."

The JPMorgan Emerging Markets Bond Index Plus started the day unchanged at Treasuries plus 274 basis points.

"We're essentially sitting and waiting to see where the geopolitical risk factors take us, or demand the market go," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "So in the meantime we're treading a little water."

Focus on Middle East, oil

During the weekend the government in Libya struggled to stay in power and violent clashes continued, dampening risk appetite and keeping alive the possibility of further contagion throughout the Middle East.

"Widespread protests and disturbances have also continued elsewhere in the Middle East and North Africa," according to an RBC Capital Markets report. "Further adding to geopolitical concerns, the North Korean regime has made predictably bellicose statements ahead of military exercises held by South Korean and U.S. forces."

In response, oil prices hovered near $100 per barrel on Monday, which provided some support for some emerging markets names, including Venezuela.

"Venezuela has softened very moderately off the fact that risk tolerance overall in the market has been toned down a notch," Alvarez said. "That being said, I think that Venezuela to a certain extent is very well supported by what is going on in crude oil markets. The expectation is that it may get much higher prices off geopolitical risks."

Argentina, meanwhile, has seen its spreads widen by about 37 bps over the month while its 2033 discount bond has tightened by 2½ points. "The widening means there's less risk absorption for risk-type assets," he said. "That has weighed on sentiment in Argentina."

Selling pressure remains

In other trading on Monday, Lebanon's 2021 bonds - which were seen at 114.25 bid, 115.25 offered on Thursday - were trading at 114.31 bid, 115.31 offered on Monday.

"Again this credit remains relatively stable versus its region and peer group," a London-based trader said.

Bahrain's 2020 bonds on Monday were seen at 92 bid, 93 offered. On Thursday those bonds were trading at 93.12 bid, 93.62 offered.

"The credit has seen some support over the past few sessions," the trader said.

And the Abu Dhabi sovereign and corporate bonds were seeing solid moves, he said.

"That shows how we are witnessing selling pressure and fund outflows across the region, no matter how low the apparent risk of protesting and unrest may be," he said.

Aldar seen wider

The trader was also keeping a close eye on Abu Dhabi-based Aldar Properties PJSC, which on Friday saw its shares fall to their lowest level on record after shareholders approved a sale of convertible bonds to Mubadala Development Co.

Aldar recently reported a full-year loss related to problem assets.

"We were a big seller of Aldar 2014s on Friday," the trader said. "The bond is opening at 106 bid, 106.75 offered, wider by 100 basis points on the week."

In looking at spreads for emerging markets names, the Philippines stands out, he said. The sovereign's spread was at 122 bps bid, 116 bps offered on Monday. Russia, meanwhile, saw its spread at 168 bps bid, 164 bps offered.

Abu Dhabi's was at 143 bps bid, 132 bps offered. And Qatar's was seen at 157 bps bid, 147 bps offered.

"Abu Dhabi and Qatar are approaching Russia, with the Philippines still wearing the yellow jersey," the London trader said.

Fibria plans notes

Argentina-based pulp and paper company Fibria Celulose SA is planning an issue of senior notes due 2021, a market source said.

Citigroup, Deutsche Bank and Santander are the bookrunners for the Rule 144A and Regulation S notes, which are non-callable for five years.

The New York-based trader expects the deal to do well.

"I'm glad it's not a perpetual issue," he said. "The credit is well liked by the market, and their previous two deals have performed exceptionally well, particularly the April 2010 deal, issued into the headwinds of heightened volatility caused by the perilous Greek debt debacle."

In other deal-related news, Moscow-based OJSC Russian Agricultural Bank has mandated Deutsche Bank, JPMorgan and VTB Capital for a ruble-denominated issue of notes, a market source said.

A roadshow for the Regulation S transaction will begin Wednesday.

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