Emerging market volumes lethargic on U.S. economic concerns; Venezuela, VTB Bank price

By Christine Van Dusen

Atlanta, Aug. 10 - Activity in emerging market debt was muted on Tuesday and yields on 10-year Treasuries fell about 8 basis points after the Federal Reserve said it would keep interest rates near zero and that economic growth in the United States has slowed in the last few months.

"We were concerned about the European situation, but now we're turning that concern toward the U.S.," said Luz Padilla, portfolio manager for the DoubleLine emerging markets fixed income fund.

As a result, action in the primary market was slow, with Venezuela pricing $3 billion notes due 2022 at par to yield 12¾%, according to a market source and an announcement on the Finance Ministry's website.

The notes - via Credit Suisse and Deutsche Bank - can be purchased in bolivars but can be re-sold for dollars.

"Venezuela is struggling to maintain its spread" in light of this new issue, which has "weighed fairly heavily on asset prices," a trader said.

VTB prices notes

Also coming to market was Russia-based lender VTB Bank with a CHF 100 million add-on to its CHF 300 million 4% notes due 2013. The add-on priced Tuesday at par to yield 4%, according to a company announcement.

The original notes, via VTB Capital and BNP Paribas, were priced at par to yield Treasuries plus 315.5 bps on July 13.

Russia, in general, has a "checkered past," Padilla said. "But one of the things I feel very comfortable with is the fact that they are very rich in commodities. They have taken this very good commodity cycle to improve their overall credit fundamentals."

During the crisis of 2008, Russia "was able to implement significant policies to help out the corporate sector as well as the banking sector because of the FX reserves they had amassed during the last 10 years," she said.

The bulk of the "securities we own are in the sovereign space or the quasi-sovereign space," she said. "We do believe the sovereign has significant resources to support its industries."

Turkish banks take steps

Several other issuers took steps toward bringing deals to market.

Hong Kong-based iron and steel manufacturer China Oriental Group Co. Ltd. mandated Deutsche Bank and ING for a $300 million to $500 million issue of five-year senior secured notes, a market source said.

The Rule 144A and Regulation S deal is expected to price this week and includes a put at 101% if either permitted holder's stake drops below 20%. Proceeds will be used for the acquisition of steel mills, for capital expenditures and for investments in iron ore assets.

Tuesday also saw Istanbul-based participation bank Kuveyt Turk tap Citigroup and Liquidity House for a $100 million three-year sukuk issue of fixed-rate senior unsecured notes, a market source said.

The Regulation S deal, to be issued through KT Turkey Sukuk Ltd., is expected to price during the Aug. 16 week.

Also from Turkey, Istanbul-based commercial bank Yapi Kredi mandated Citigroup, Deutsche Bank and UNIC as bookrunners for a possible issue of notes, a market source said.

No other details on the proposed issue were available Tuesday.

Market sources also were whispering about a possible $1 billion 10-year offering of notes from Sri Lanka, which could price in September.

The trader expects "new issuance to be slower the remainder of the month" but to "rapidly pick up again in the early days of September."

Recent issues trade up

Volumes were down somewhat due to the summer doldrums but were "considerably high for August," the trader said. That's being assisted by a glut of "consistent new supply."

The slower flow of deals in the primary market "is pushing recent new issues to new highs on what seems like a daily basis," he said.

The trader pointed to Medellin, Colombia-based lender Bancolombia's $620 million 6 1/8% notes due 2020 that priced at 98.418 to yield 6.341%, and Brazil-based steel producer Companhia Siderurgica Nacional's $1 billion 6½% 10-year notes that priced at 99.096 to yield 6 5/8%.

Both were stronger on Tuesday, he said.

Overall, EM credits are "trading inside comparable U.S. credits," Padilla said. "EM is trading 10 basis points cheap."

The sovereign space, in general, has "gotten a little bit ahead of itself," Padilla said. "We think the EM sovereign space has in some instances become a crowded trade."

Inflows rise again

The emerging markets asset class continues to see "very strong inflows," a market source said.

Indeed, for the week ended Aug. 4, bond funds took in more than "$600 million for the ninth consecutive week," according to a report from data tracker EPFR Global.

"Against a backdrop of disappointing U.S. employment, manufacturing and housing markets data, investors steered their cash into emerging markets funds during early August as they sought protection from the dollar weakness they believe will follow," the report said.

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