European stress tests distract investors, stall new bond issuance; Hungary faces downgrade

By Christine Van Dusen

Atlanta, July 23 - The wave of new deals from emerging market issuers came to an abrupt halt on Friday due to the usual summertime, end-of-week malaise and the distraction of somewhat unexpectedly positive results from the stress tests for European banks.

But this wasn't bad news for emerging market debt. Europe's banking sector looks stronger in light of the tests, there's a lot of recent supply to digest, and recent comments by Federal Reserve chairman Ben Bernanke about the economy and interest rates helped pump up EM bond funds.

The current inflow streak has been extended to eight consecutive weeks, according to data tracker EPFR Global.

All of this is "very convenient for the whole EM debt class," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "That's where the market firmness gets its support."

Greece fares well

Of 91 banks surveyed, only seven banks failed the stress tests, which were designed to determine whether lenders had enough capital to withstand further weakening of the global economy. While most market-watchers didn't expect to see widespread failure, many thought that embattled sovereigns like Greece would fare somewhat poorly.

But in Greece, only Athens-based lender ATEBank failed the test.

"We had expected several might fail and they might need $10 billion in that country alone," an economic strategist said. "But none of that came to pass."

ATEBank only needs to raise €242.6 million, a source said.

"The fact that some banks only have to do $3.5 billion is suspect," the economic strategist said. "I don't know why exactly. We're waiting for everything to come out. It's out in dribs and drabs. But in general I would've thought the results would have been a lot worse."

In response, five-year credit default swaps for Greece declined to about 758 basis points, a source said.

Hungary could get downgrade

Meanwhile, Hungary was again in the news on Friday, this time because the sovereign - which recently shut down talks with the International Monetary Fund after butting heads over a bailout loan - faces the possibility of a ratings downgrade from Moody's Investors Service.

Hungary's local- and foreign-currency bonds are currently rated Baa1.

In turn, several Hungarian banks are also facing possible downgrades from Moody's, a source said.

The situation with Hungary is impacting other sovereigns "very marginally," Alvarez said. "If the downgrade happens, there will be more reverberations. But at this point it hasn't infected Latin America or EM to a great degree."

Primary market slows

As a result of all these distractions, the primary market was very still on Friday.

Activity is expected to pick up again next week, a source said, with possible pricing of eurobond notes from Belarus and $200 million senior unsecured notes due 2013 from Shanghai-based women's apparel company E-Land Fashion China Holdings Ltd.

Also upcoming are planned notes due 2020 from Chile via Citigroup, HSBC and JPMorgan in a Securities and Exchange Commission-registered transaction. The issue will include $1 billion in dollar-denominated bonds and $500 million in Chilean peso-denominated bonds, a source said.

Proceeds will go toward reconstruction efforts related to the earthquake that hit Chile in February.

A roadshow may take place in the July 26 week, the source said. The deal is "around the corner."

Sources are also whispering about a possible 10-year deal from Sri Lanka, worth up to $1 billion, and planned notes from Singapore-based Neptune Orient Lines.

Venezuela underperforms

In the secondary market, there was "a touch of profit-taking," Alvarez said. "The market had a run in front of what occurred on the positive side from the European stress tests. We're absorbing a lot of unexpected positives out of Europe."

Most of the day's outperformers were high-beta credits like Argentina, Alvarez said. "People are accumulating yield," he said. "That is mostly a terrain that belongs to Argentina, which has advanced solidly on the week."

Venezuela, however, has suffered since president Hugo Chavez broke off diplomatic ties with Colombia after that sovereign accused Chavez of harboring rebel groups in his country.

"Venezuela was in a leading role a couple of days back but all the saber-rattling with Colombia has stalled it," Alvarez said.

The Venezuela 2027 bonds ended last week at "68 7/16," he said. As of mid-afternoon on Friday, they were trading at "about 71. They've risen about 2 points. It could've been a better week if not for the fact that they have decided to break off the relationship with Colombia. Without that, it could have been a very good week."

© 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.