Foodcorp sells notes as Middle East keeps volumes, issuance light; bond funds see inflows

By Christine Van Dusen

Atlanta, Feb. 25 - Though risk appetite was somewhat improved on Friday, only South Africa's Foodcorp Ltd. printed notes as most emerging markets investors and issuers remained planted on the sidelines, fatigued by the continued unrest in the Middle East and the related undulations in oil prices.

"These are tricky and thin markets overall as these amazing times dominate global news," a London-based trader said.

The increasingly violent conflict between anti-government protestors and security forces in Libya recently led to a disruption in oil output, sending the price of crude skyrocketing to near $100 a barrel. But on Friday, Saudi Arabia upped its production, and crude prices fell to about $98 by mid-afternoon.

"The price of crude rallied this morning but failed to hold the gains," according to a report from RBC Capital Markets. "Investors are reassessing the significance of an interruption to Libyan oil supply."

So volumes remained low, a London-based market source said.

"Still, there's generally a better tone," he said. "Spreads are a little tighter than yesterday as the equities market is stronger. There are hopes that something will be rectified in Libya this weekend."

In the meantime, "it's very quiet," a New York-based market source said. "There's not much pricing today. Hopefully it will pick up by mid-March."

Foodcorp prints notes

The €390 million senior notes due March 1, 2018 from South Africa-based branded food manufacturer Foodcorp priced Friday at par to yield 8¾%, a market source said.

The deal came to market at the lower end of talk, which was set at 8¾% to 9%.

JPMorgan and Barclays Capital were the bookrunners for the Rule 144A and Regulation S notes, which are non-callable for three years and include a change-of-control put at 101%. The deal also includes an equity clawback of up to 40% at 108.75.

Proceeds will be used for general corporate purposes and to refinance existing senior secured notes, to settle existing hedging arrangements and to fund the repurchase or redemption of certain securities issued by parent company New Foodcorp Holdings Ltd.

Russia trades up

One market source was keeping tabs on the RUB 40 billion notes due March 10, 2018 that Russia priced on Thursday at par to yield 7.85%.

Deutsche Bank, JPMorgan, HSBC, Renaissance Capital and VTB Capital were the bookrunners for the Rule 144A and Regulation S deal, which priced slightly tighter than talk of 7 7/8% to 8%.

"That was pretty interesting," the source said. "It's up about 10 cents from the reoffer price."

The London-based trader was tracking Qatar National Bank, Commercial Bank of Qatar, QTel International, Dubai Water and Electricity Authority and Abu Dhabi National Energy Co.

He was also seeing some demand for Bahrain credits. And Lebanon was looking "pretty stable," he said.

"I suspect street inventory and positioning is fairly light with some shorts perhaps being covered yesterday and today," he said. "Clearly there's been some de-risking and selling pressure this week and also selling across the board in even the so-called solid and defensive names."

Inflows return

Emerging markets bond funds saw inflows of $96 million for the week ended Feb. 23, according to data tracker EPFR Global.

That's a marked improvement over the previous week's outflows of $741 million - the biggest weekly outflows seen since December 2008.

For this most recent week, hard currency flows saw outflows, but those were offset by positive flows for funds with local currency and blended mandates, said Cameron Brandt, senior analyst with EPFR.

"People were still focused on rotating out of fixed income into equity, and within equity rotating from emerging markets to developed markets," he said. "That underlying trend was then given a kick in the pants by the increasingly lurid events out of the Middle East and North Africa."

Investors are now getting a stark reminder of the political risk associated with emerging markets, he said.

"They'd done a pretty good job of ignoring that through most of 2009 and 2010," he said.

Also impacting the flows picture is the weakness of the dollar, he said.

"The local currency funds are getting the money," he said. "We're seeing some modest hedging activity against the decline of the dollar."

Funds geared toward the energy industry or the big energy producers generally fared better during the week than the funds geared toward users of energy, he said.

"And there is still a hunger for yield out there, and that's supportive on some level for EM debt," Brandt said. "But investors seem to be going more for developed markets and high yield at the moment."

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