Emerging markets quiet, thin as year-end nears; Nakheel pay-off rumor helps; funds add cash

By Christine Van Dusen

Atlanta, Dec. 11 - Emerging markets were quiet and trading thin Friday as investors looked ahead to the winter holidays and year-end while also digesting the news that Nakheel PJSC's troubled $3.5 billion bond could possibly be paid off on time, market sources said.

The Nakheel bond, a sukuk issued by the government's development arm, is set to mature on Monday. Repaying it on time could signal that Dubai is better prepared to handle its planned $26 billion debt restructuring, which has been roiling the markets and making investors nervous for a couple of weeks.

The bond traded Friday at about 53.75 cents on the news, near its recent highs and up from a low of about 40 cents last week.

But some market sources were skeptical about Dubai's chances of repaying the Nakheel bond.

"The rumor that they're going to pay back the bond on Monday - I would find that hard to believe," a London-based market source said. "But given the lack of clarity and communication from the region, nothing surprises me anymore."

Overall, investors are coming to terms with the Dubai situation and are feeling less spooked by it, according to an emerging markets strategist.

"The jitters we saw earlier in the week and late last week seem to be going away," the source said.

"Dubai really isn't going to be that big of an issue after all. There's been a lot of back and forth on investor sentiment: it's a buying opportunity, then it's not, then it is again. So we'll have to see. It's such an opaque region in terms of information and contingency liabilities.

"But most people seem to think it can come to grip with the major issues."

EMBI steady, cash flows in

So despite the uncertainty generated by the Dubai controversy, the spread between U.S. Treasuries and JP Morgan's benchmark Emerging Markets Bond Index Plus remains about 320 basis points, according to data service EPFR Global.

"Investors continue to commit fresh cash to emerging markets bond funds, albeit at a slower clip than earlier in fourth-quarter 2009," the firm reported. "They took in another $317 million, with funds investing in local currency debt account for over 90% of the week's inflows."

While all of this might appear to hearten issuers that have been skittish in recent weeks - namely Latvia with its planned euro-denominated offering via Citigroup and Credit Suisse, and the Dominican Republic's planned benchmark bonds via Barclays and Citigroup - the fact that it's nearly year-end could delay pricing on any new issues, the London-based source said.

"With it being two weeks before Christmas, there's not much interest out there," the source said.

Senegal delays notes

However, there is one issuer that is expected to come to market before the end of the year, even though it delayed its bond offering from the week just completed: the Republic of Senegal. The sovereign had been expected to price its $200 million issue of five-year bonds on Friday but is now looking at next week, according to informed sources.

"They're looking at a 8¾% yield," the London source said.

Other than that, "a major sovereign could surprise the market with a big issue," the strategist said. "But if they don't issue in the next week they may as well forget about it. And there's nothing on the schedule."

The Republic of Senegal is delaying its planned issue of $200 million five-year notes (/B+) until next week, according to market sources.

The deal, the sovereign's first dollar bond, was expected to come to market by Friday.

Citigroup is the bookrunner.

Nakheel near highs

A trader said that Dubai development company Nakheel's 3.172% sukuk slated to come due on Monday was at 53 bid, while its floating rate notes due 2010 were at 30-33 and its 2¾% notes due 2011 at 36-39.

"It looks lower," he said, versus the 54 bid, 57 offered context to which the Dec. 14 bonds rose on Thursday, their biggest gain in nine months. He saw the floaters about unchanged, and the 23/4s off from the 39-44 area at which they traded on Thursday.

At another desk, the 53 level was seen "a little higher" from around a 51 level on Thursday, while the other two issues were essentially unchanged.

The bonds were seen remaining above their recent lows, which included levels in the mid-to-high 40s for the Dec. 14 bond, amid news reports that the developer - a unit of the state-run Dubai World conglomerate - may seek to avoid a default on the $3.52 billion Dec. 14 issue. Among the ideas reportedly being bandied about in talks between Dubai World and its banks is paying the bondholders about 70 cents on the dollar for their paper, and then issuing new securities to cover the unpaid portion of the debt.

-Paul Deckelman contributed to this report

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