Emerging market debt mixed on U.S. Treasuries volatility; Ocean Grand sells $125 million notes

By Reshmi Basu and Paul A. Harris

New York, Nov. 30 - Emerging market debt saw a mixed bag of trading on the back of weaker U.S. Treasuries Wednesday.

In the primary market, Hong Kong-based aluminum producer Ocean Grand Holdings, Inc. priced a $125 million issue of 9¼% five-year guaranteed secured notes (BB-) at 99.51 to yield 9 3/8%.

The yield came in the middle of the 9¼% to 9½% price talk, which had been revised upward from 9% to 9¼%.

ABN Amro ran the books for the Regulation S transaction.

Meanwhile, two former debt-laden companies have recently joined the pipeline and are expected to price deals in December. Thailand's Advance Agro is tapping the Asian high-yield market with an offering of $250 million in bonds.

The Asian financial crisis hit the pulp and paper manufacturer hard, resulting in the company defaulting on its debt.

And power company AES Corp. is another pipeline issuer that saw many of its emerging markets subsidiaries restructure their debt. AES Dominicana Energia is expected to tap the market with a $160 million offering of 10-year bonds.

These companies' ability to tap the capital market does not necessarily indicate an over-exuberant market but it does show that the search for yield is very much alive and kicking in the asset class, according to an emerging markets analyst.

"Both these companies should be given some credit for having restructured themselves to become stronger players, so I wouldn't necessarily say that these deals are red flags of excessive enthusiasm in EM," the analyst said.

"But the ease with which they appear to be getting deals done, at the same time that plenty of issuance is coming out of Russia and elsewhere, is, I believe, a sign that appetite for EM remains high and that investors are willing to take on plenty of additional risk for just a little additional yield," he added.

EM mixed on Treasuries

Emerging market debt was mixed Wednesday in response to a softer Treasuries market. The session was saddled with a barrage of U.S. economic reports, which resulted in a volatile session for Treasuries.

Earlier in the session, Treasuries gained footing following the release of gross domestic product data in the United States. The report showed that economic growth was up by 4.3% in the third quarter, coming in more than expected.

More importantly, a key inflation measure was revised down. The core personal consumption expenditure price index increased by 1.2%, compared to a previous estimate of 1.3%

But later on, Treasury prices were unsettled by the Chicago purchasing managers index. That figure came in at 61.7% for November, down from 62.9% the previous month. But it was the prices paid index that spooked the market. The index jumped to 94.1, reaching the highest level in 26 years.

At the end of the session, the yield on the 10-year note stood at 4.50%, up from Tuesday's close of 4.48%.

Liquid names such as Brazil were softer in reaction to weaker U.S. governments, observed sources.

Additionally, trading volumes were light in the spirit of the year-end slowdown, commented sources.

During the session, the Brazilian bond due 2040 was down 0.15 to 123.15 bid.

"Some credits tightened. Others widened," remarked a buyside source.

"It looks like the more illiquid credits stayed firm on a price basis, which made their spread tighter," noted the source.

But the source noted that Eastern European credits such as Russia and Ukraine were slightly wider on the day.

Also, spreads for South Africa kicked out. The country's trade deficit widened in October to ZAR5.5 billion compared with a deficit of ZAR3.7 billion in September.

Elsewhere, bonds ticked lower in Ecuador. Late Tuesday, the country's congress approved the 2006 budget, which would shift $440 million, including $397 million earmarked for debt service, for social spending.

By session's end, the Ecuador bond due 2030 had slid 0.35 to 91¾ bid.

Palocci concerns

Traditionally December has been a good month for the emerging markets asset class. Unless something tragic happens, the sector should outperform, commented the buyside source.

Nonetheless, the source is keying on developments in Brazil regarding finance minister Antonio Palocci.

There have been murmurs that Palocci may exit his post as he comes under increasing pressure to loosen the strings of monetary policy. He has denounced such a shift in policy.

Brazil reported Wednesday that its gross domestic product fell for the first time in two years. The country's GDP increased a slim 1% on an annual basis in the third quarter, but fell 1.2% from the second quarter, putting additional pressure on Palocci.

Rumors of his departure have quieted down, replied the source, adding, "that's something to keep on the back of everyone's minds."

Looking ahead, headlines will erupt out of Latin America as the campaign season approaches. But for now, the buyside source does not see any major political risks.

Year-end performance is looking pretty good for now, noted the source.

© 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.