Sri Lanka sells bonds as E.U. agreement lifts risk tolerance; Afreximbank notes in demand

By Christine Van Dusen

Atlanta, July 21 - The Republic of Sri Lanka sold notes on Thursday as risk appetite improved on the back of news that E.U. leaders had agreed to reduce the interest rate on bailout loans for debt-saddled sovereigns.

The rise in jobless claims in the United States, along with continued uncertainty about debt talks, did little to damper enthusiasm for emerging markets assets.

"Much like the G7 meetings back in 2009, the E.U. steps up with a series of measures that the market is loving," a trader said. "In this environment, Europe, the Middle East and Africa have also enjoyed a bounce, with the love being felt in all the high-betas."

The JPMorgan Emerging Markets Bond Index Plus spread tightened 10 basis points to Treasuries plus 270 bps.

"It's mostly a risk-on day. You have mostly high-beta credits in outperformance mode," a New York-based market source said. "People are taking risks and, essentially, placing a little more chips on yield."

According to a report from RBC Capital Markets: "EM assets for the most part were back in rally mode Thursday, tracking the positive tone in core equity markets."

Sri Lanka does deal

In its new deal, Sri Lanka sold $1 billion notes due 2021 at par to yield 6¼%, a market source said.

Bank of America Merrill Lynch, HSBC and RBS were the bookrunners for the Rule 144A and Regulation S notes.

The deal attracted $7.5 billion of orders from 315 accounts, with 43% from the United States, 30% from Europe and 27% from Asia. Fund managers accounted for 86%.

In other deal-related news, the Dominican Republic set initial price guidance at the low 7% area for its planned $500 million add-on to its 7½% notes due 2021, a market source said.

Barclays Capital and JPMorgan are the bookrunners for the Rule 144A and Regulation S deal.

Proceeds will be used to finance infrastructure projects, as well as to provide economic support to other sectors of the economy.

In response, the sovereign's existing 2021 notes opened at 103.5 bid, 104.25 offered and later traded as high as 105.

Afreximbank trades up

Getting a lot of attention in the secondary market on Thursday was the recent issue of notes from Cairo-based African Export-Import Bank (Afreximbank). The lender sold $500 million 5¾% notes due July 27, 2016 at par on Wednesday via Commerzbank, HSBC, Mitsubishi UFJ Securities and Standard Bank in a Regulation S deal.

"We're seeing very good flow in the new Afrexim 2016s," a trader said.

The notes were seen at 101.60 bid, 101.75 offered early in the European session.

"Hiding in the midst of the chaos is $3 billion of demand for Afrexim," another trader said. "It snaps 35 bps tighter to 5.4% on very broad-based demand."

Later in the day, good liquidity was seen at the 101.50 level. "The rest of Africa is enjoying some focus on the back of it," a market source said.

Turkey weakens

In other trading on Thursday, Turkey was weaker after Fitch Ratings expressed uncertainty about a possible upgrade given the sovereign's current account deficit and bank credit growth.

Better sellers were seen for Turkey-based Garanti Bankasi AS' 2021s and better buyers were noted for Akbank's 2015s.

"Activity was low until the end of the E.U. summit, but picked up as the rally monkey took over," a trader said. "Akbank and Garanti papers were much better supported on the screens today."

The trader noted Garanti's 2021s and Akbank's 2015s traded in the region of 97 and 99, respectively.

BTA, Metalloinvest active

Other active names on Thursday included Kazakhstan's BTA Bank, Ukraine and Emirates airline. Russia's Metalloinvest Finance Ltd., which on July 15 priced $750 million five-year notes at par, saw the new issue trading at 100.40 bid, 100.65 offered on Thursday.

"BTA's 2018s are up ¾ of a point at 86.75," a trader said. "In Ukraine, the 2021s are up 1 point at 104, and in Russia the Vimpelcom 2022s are finally back to 100."

And Qatar's Qtel International saw demand.

"It takes faith, but this year you've been paid to fade these moves," he said.

E.U. news may hurt EM

One trader was questioning whether a better story for the European Union would actually prove to be bad news for emerging markets assets.

"If the E.U. really does pull a rabbit out of the hat today, is it really good for EM?" he said. "One of the drivers for our outperformance has been the fleeing from the euro zone. If investors suddenly go for Italy and Spain at 5%, perhaps Turkey, Kazakhstan and Gazprom at around 4% become less attractive?"

Venezuela in focus

Looking to Latin America, many eyes were on Venezuela, which has been "sending contradictory signals" about the possibility of a new issue of notes, according to a report from Barclays Capital.

The sovereign is said to be mulling a $3 billion issue of notes that could grow to as much as $4.2 billion and mature sometime between 2024 and 2032 with a coupon of 10% to 12%.

"We have been saying that part of the high country risk that Venezuela maintains is due to poor communication about crucial issues for investors, among the most important being debt strategy and new issuance," the report said. "We expect the issuance to be for $4 billion, without discarding a possible increase to $5 billion. In our opinion, $4 billion issuance is priced on the market, with a likely positive reaction if the government reduces it to $3 billion, but also with downside pressure if it decides to increase to $5 billion."

LatAm mostly quiet

All the talk of new paper from Venezuela has managed to hamstring other Latin American issuers, who are waiting it out before bringing new notes to the market, said Enrique Alvarez, senior debt strategist with think tank IDEAglobal.

"That's capping, somewhat, the activity in Venezuela because they know there will be a high degree of long-duration issuance," he said. "That's why Argentina is up 1.8% on the day and Venezuela is up only 1%."

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