Emerging markets weaker, volumes thin on tense geopolitical concerns; Country Garden eyed

By Christine Van Dusen

Atlanta, Feb. 15 - Emerging markets investors were skittish - and issuers nearly silent - on Tuesday as protesters in other Middle Eastern nations followed Egypt's example, which led to thinned volumes and a significant slowdown in new deals.

"External debt markets were cautious, with the upward bias to spreads continuing," according to a report from RBC Capital Markets.

The JPMorgan Emerging Markets Bond Index Plus widened by 2 basis points before closing the day near flat, with Argentina wider by 14 bps and Venezuela by 13 bps.

"The mood toward EM remains highly uncertain with most investors completely lacking conviction, warranting defensive positioning near term," RBC said.

Said a London-based market source: "There are worries about the Middle East and Africa, with trouble in Bahrain, and worries about Iran. That's making the market a bit nervous."

Sustained weakness was seen throughout the market on Tuesday, said Nick Chamie, head of emerging markets research for RBC.

"We've seen weakening in commodity prices as well as generalized risk aversion or profit-taking across the board," he said. "That's feeding through into EM assets."

Market pauses

Compounding the problem, Chamie said, is the sense that the market is due for a mid-cycle correction.

"I think there's been an ongoing rotation out of EM, out of some of the early rallying leaders," he said. "Given the prospect that inflation is going to continue to be an issue in EM, and rate hikes are on deck, it looks like the market is in for a mid-cycle pause of correction here."

That pause is likely to last several weeks, he said.

"Volumes are way down overall. Turnover has thinned out," he said. "Conviction is quite low, so I think it's fair to say that overall activity has come off."

A New York-based market source agreed: "It's very, very quiet."

Jamaica in demand

New deal flow sputtered on Tuesday, with the market mostly keeping an eye on recent issues, such as the $400 million add-on to Jamaica's existing $350 million 8% notes due June 24, 2019. The notes came to market on Monday at 100.256 to yield 7.95%, a market source said.

BNP Paribas and Deutsche Bank were the bookrunners for the Regulation S deal.

Proceeds will be used to repay the sovereign's $400 million 11¾% notes due 2011.

The deal was three times oversubscribed and attracted more than $1 billion of orders from the United States, Europe, Latin America and the Caribbean, according to a press release from Jamaica's Ministry of Finance.

BECL prices notes

Monday also saw Beijing's BECL Investment Holding Ltd. - a subsidiary of real estate development company Beijing Capital Land Ltd. - price RMB 1.15 billion notes due Feb. 21, 2014 at par to yield 4¾%, according to a company announcement.

HSBC was the bookrunner for the Regulation S notes.

Proceeds will be used for funding the company's Interest Reserve Account, to finance acquisitions and for general corporate and working capital purposes.

Also from the Chinese property development industry, Country Garden Holdings Co. Ltd. has set the size for its planned issue of seven-year notes at $750 million, a market source said.

Goldman Sachs, JPMorgan and Deutsche Bank are the bookrunners for the Rule 144A and Regulation S notes, which are non-callable for four years.

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

Ukraine plans deal

In other deal news, Ukraine has mandated JPMorgan, Morgan Stanley and VTB Capital for a dollar-denominated issue of notes, a market source said.

The Rule 144A and Regulation S transaction is expected to launch soon.

"That looks like a nice deal, possibly at 8% for 10 years," a London-based source said. "I hope they don't cut it."

And market-watchers say that the Republic of Poland, Buenos Aires, Scotiabank Peru and Rio de Janeiro are also mulling deals.

Mexico trades up

One source said he was keeping tabs on the $1 billion tap of Mexico's 5 1/8% notes due Jan. 15, 2020, which came to market Monday at 102.01 to yield 4.844%.

The notes were seen trading Tuesday at 102.50, he said.

"It looks like it made back some of the weakness that had preceded the announcement," he said. "Spreads have been widening out across the board over the last month, so in general debt spreads haven't held in and bonds are underperforming."

Also from Latin America, Brazil's bonds saw better volumes and slightly higher prices on Tuesday, a trader said. Most of the activity centered on the sovereign's 2021 bonds, which closed at 100.50 bid, 100.70 offered.

Colombia also saw higher prices, albeit on lighter volumes, with the 2019s getting the most attention and trading around 118.

Venezuela and Petroleos de Venezuela SA (PDVSA) experienced the strongest volumes and the most volatility, the trader said. The corporate's new 2022 notes - which priced at par to yield 12¾% - traded in the 85 to 85.30 range.

Egypt CDS up

In other trading on Tuesday, Egypt's five-year credit default swaps were seen at 320 bps bid, 340 bps offered after closing close to 315 bps bid, 335 bps offered on Monday.

The sovereign's 2020 bonds - which traded Monday at 96 bid, 97 offered - were seen at 95.50 bid, 96.50 on Tuesday.

A London-based trader noted market interest in Abu Dhabi National Energy Co.'s 2012 bonds, which were trading at 104.62 bid, 104.87 offered. The corporate's 2013 bonds were seen at 107.25 bid, 107.75 offered.

"Abu Dhabi credits are solid," he said.

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