Emerging market debt grinds tighter; Gallery Group sells $175 million seven-year notes

By Reshmi Basu and Paul A. Harris

New York, May 10 - Spreads for emerging market debt tightened again Wednesday, even after the Federal Reserve appeared to have left the door open for more rate hikes in the statement accompanying its decision to raise the fed funds rates to 5%.

In the primary market, Russian outdoor advertiser Gallery Group sold an upsized $175 million offering of seven-year senior secured notes (/B-/) at par to yield 10 1/8%.

The size of the issue was upped from $150 million.

Citigroup was the bookrunner for the Rule 144A for life/Regulation S deal.

On the pipeline front, another Russian bank is expected to price a deal on Thursday. Russian Agricultural Bank set initial price talk for a dollar-denominated offering of seven-year bonds (Baa1//BBB) at mid-swaps plus 170 basis points area, which translates to a yield in the 7¼% area.

The size of the issue is likely to be $500 million to $700 million.

Deutsche Bank and JP Morgan are lead managers for the Rule 144A/Regulation S transaction.

For comparative purposes, last Friday JSCB Bank of Moscow sold $500 million in seven-year senior loan participation notes (Baa1//BBB-) at par to yield mid-swaps plus 175 basis points

The new issue is trading at around 7.32% on the bid side or 100.05.

Also adding to the pipeline, Brazilian utility company Energisa SA plans to issue $250 million of perpetual bonds (/B+). And Qatar Petroleum plans to start a roadshow for a dollar-denominated benchmark-sized debut offering of five-year fixed rate bonds (A1/A+) on Thursday via Citigroup and Credit Suisse.

Meanwhile, the asset class is treading on a supply overdose, according to a buyside source.

"There's a lot coming from that [corporate] sector of the market," voiced the concerned source, which may in turn trigger a technical correction.

However, there has not been a whole lot of issuance on the sovereign side, noted Enrique Alvarez, Latin American debt strategist.

The upswing in corporate supply is a normal outcome of the voracious appetite that investors have for emerging market credits, he said.

"It was like that back in '96 and '97, so you can't be that surprised to see it."

"There are a lot of announcements out there for corporate names. But at this point it's hard to make an argument that the corporate names will drive down the sovereign side," Alvarez added.

EM gains

Emerging market debt ratcheted gains Wednesday, even as investors speculated that the Federal Reserve will continue to hike interest rates.

"The committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information," the statement said.

Market sources said the statement provided the central bank flexibility in regards to its monetary tightening campaign. Initially, the 10-year U.S. Treasury note sold off in reaction to the seemingly hawkish statement, noted the buyside source.

But then pressure on the 10-year note eased once investors began to realize that the Fed could not exactly come out and say, "We're gonna stop today," said the source.

"All in all, our [EM] bonds are holding up pretty well, but Treasuries are also coming back," noted the buyside source.

The response by the asset class was muted and positive, according to Alvarez.

"If you look across the curve, Brazil is higher. "Colombia seems to be somewhat better. Peru has also improved," he noted.

By session's end, the Brazilian bond due 2040 had edged up 0.20 to 128.20 bid, 128.25 offered. The Russian bond due 2030 had gained 0.38 to 108.125 bid, 108.25 offered and the Venezuelan bond due 2027 had added 0.35 to 125.80 bid, 126.25 offered.

Moreover, Alvarez observed that while the statement gives the Fed space to raise rates higher, the market also believes that the Fed is due for a pause sooner rather than later. Investors now believe that the central bank will raise rates another 25 basis points to 5¼% at its next meeting in June. And then the Fed will press pause.

However, Latin America has not paid all that much attention to U.S. rates. Instead the region has focused on the commodity story, which has allowed the region to manage its liabilities as well as its fiscal accounts, Alvarez observed.

EM to be more data driven

During the session, spreads narrowed to near all-time tights. Nonetheless, the buyside source noted that there is not much room left for spreads to grind tighter, perhaps moving in a range of 10 basis points here and there.

Moving ahead, emerging markets is likely to become even more U.S. data sensitive, he said.

"We're going to need a couple of months to see any trends that might give us an indication on something," added the buyside source,

However, sources noted that oil and gold prices will play into the Fed's decision-making calculus.

"Those who are convinced that gold is a bellwether for inflation obviously have to be worried because that signals investor concern with inflation, which Treasuries are not reflecting at this time," remarked Alvarez.

On the other hand, there is another camp that does not believe that gold can be used as a market indicator for inflationary pressure. Instead, it is demand driven and its price has skyrocketed on the recycling of petro-dollars, he said.

"Gold prices at $700 is a positive for some Latin American issuers, such as Peru."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.