Russian Railways prints notes as Japan, Middle East fears keep EM trading, issuance slow

By Christine Van Dusen

Atlanta, March 18 - OAO Russian Railways Co. sold notes on a Friday that saw slightly better risk sentiment but still little issuance and lighter volumes for emerging markets.

The muted activity came even as the conditions at the Fukushima nuclear plant in Japan appeared to improve and G-7 nations agreed to intervene in the country's foreign exchange market.

Meanwhile, news that Libya's Moammar Gadhafi had ordered a cease-fire helped to push stocks up and oil down, but the move failed to ignite much enthusiasm for emerging markets assets.

"It's been a mildly positive tone with help from the Middle East peace moves and less tension in Japan, but not a lot of trading going on," a market source said.

Volumes thinner

Volumes, he said, were even lower Friday than they'd been during most of the week.

"We haven't seen much risk appetite," he said. "It feels as if people are on hold."

Said a trader: "We're seeing some Friday lethargy, though the G-7 currency intervention is certainly helping the mood."

That marked the end of a week that, for the most part, was risk-off.

"High anxiety over Japan's nuclear crisis weighed on EM assets this week, though our asset class did hold up relatively well, and we detected limited sustained panic-liquidation," according to a report from RBC Capital Markets.

Russian Railways sells notes

In its new deal, Moscow-based Russian Railways priced £350 million notes due March 25, 2031 at par to yield 7.487%, or Gilts plus 325 basis points, a market source said.

The notes priced in line with talk, which was set at the Gilts plus the low 300 bps area.

Barclays Capital, Goldman Sachs and VTB Capital were the bookrunners for the Regulation S deal. The notes include a change-of-control put at par if government ownership falls below 66%.

"It's a fascinating deal," a London-based market source said. "Full marks to the underwriters for tackling a notoriously tricky currency for EM. The credit is a simple and strong story. It's government-controlled and a strategically important rail operator with a solid Baa1 and BBB rating."

Sterling investors have typically shied away from EM, he said.

"But this looks like a great deal, and the huge price talk will bring them all in," he said.

Sterling issues in focus

Several similarly rated names have come out with long sterling bonds at about Gilts plus the low 200 bps area, he said, including Mexico-based petrochemical company Petroleos Mexicanos SAB de CV (Pemex).

"Pemex also has an 11-year at Gilts plus 240 bps," he said.

Abu Dhabi-based oil investment entity International Petroleum Investment Co. also did a recent multi-tranche deal that included £550 million 6 7/8% notes due 2026 that priced at 99.506 to yield Gilts plus 270 bps.

"IPIC is a red herring," a market source said.

Russia trades up

In trading on Friday there was some buying of Russia 30s, which were seen up at 116 3/16, and Gazprom was seen tighter by 10 bps, a trader said.

"Even Turkey has a good bid despite Brent crude being back at $116.50," he said. "Clearly the sticker shock has passed."

In the Middle East, Dubai was 10 bps tighter. "Luckily for us, Libya doesn't have any tradable debt," he said.

The stand-out in the region was again Bahrain. The sovereign was downgraded two notches to BBB by Standard & Poor's.

"It's the strength in Bahrain that's the most unusual," he said. "Bahrain's 2020s are back at 93. It's not often that tanks are good for credit risk."

Said another market source: "The 2014 dollar notes really feel hard to come by at the moment."

Market-watchers were also keeping an eye on Saudi Arabia, where King Abdullah has ordered increases in government spending as a means to quell anti-government protests.

"The checkbook is out," the trader said.

Philippines taps bookrunners

In other deal-related news, the Republic of the Philippines has mandated Citigroup, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan and UBS for its planned dollar-denominated issue of notes, a market source said.

The notes are expected to total up to $2 billion and be issued during the second quarter.

Also on Friday, Inkia Energy Ltd. - the Peru-based subsidiary of holding company Israel Corp. - mandated Merrill Lynch and Credit Suisse for a dollar-denominated issue of notes, a market source said.

A roadshow for the Rule 144A and Regulation S notes will begin Tuesday and travel from London and Santiago, Chile, to Geneva, Zurich, New York and Boston before concluding on March 28 in Los Angeles.

And state-owned lender Development Bank of the Philippines set the tenor at 10 years for its planned issue of $300 million notes, a market source said.

Credit Suisse, Goldman Sachs, HSBC and JPMorgan are the bookrunners for the deal.

South Africa plans roadshow

South Africa is planning a non-deal roadshow that will begin March 28 in Boston, a market source said.

Citigroup, Deutsche Bank and Rand Merchant Bank are arranging the marketing trip, which will travel to New York, Los Angeles, San Francisco and London before ending in Frankfurt on April 6.

Also from Africa, the Ivory Coast was once again in the news, as Laurent Gbagbo continues to refuse to step down and is now encouraging civilians to fight the rebels, raising concern that a civil war might break out.

"The bonds are down to 35," a trader said.

Market sources also were whispering about possible notes issues from Kazakhstan and Brazil-based consumer goods company Hypermarcas.

Inflows rise

Emerging markets bond funds saw inflows for the week ended March 16 of $241 million, according to data tracker EPFR Global.

That's a-nine week high, with both hard and local currency funds seeing new money, said senior analyst Cameron Brandt.

"What we're hearing is that there's selective commitment to EM debt classes - mostly by country - viewed as oversold," he said.

During the previous week, EM bond funds saw outflows of $260 million.

"Local currency flows were hit hardest," he said. "That number was skewed by one fund, but there was a general re-assessment of EM currencies in light of their oil import bills."

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