Top-notch performance from Sri Lanka, Transnet, ICA bonds amid light volumes; inflows seen

By Christine Van Dusen

Atlanta, July 20 - Emerging markets assets finished off a hectic week on a quiet note, fatigued on Friday after the feeding frenzy for recent new issues from Sri Lanka, South Africa-based Transnet SOC Ltd. and Mexico's Empresas ICA SAB de CV.

"It was a quiet end to the week. Very, very light volumes today," a Connecticut-based trader said. "The week on the whole was relatively busy. A lot of new supply has been taking up the majority of our time.

"I've definitely been surprised by these deals this week, how they ended up being tightened from original price talk."

Not even a rise in Spanish bond yields or a decline in earnings for several large companies in the United States - which spurred a flight to safety in the broader markets - could break the spirit of emerging markets investors.

"Negative headlines out of Europe are not really causing any selling," a trader said.

Investors are sitting on a great deal of cash at the moment, with EM bond funds continuing to see inflows - a total of $935 million for the week ended July 18, according to a report from data tracker EPFR Global.

But supply remains limited.

"Portfolio managers keep seeing these inflows and looking for places to put money," the Connecticut trader said. "I've heard complaints that they're having trouble allocating funds, particularly on sovereigns like Peru, Colombia and Mexico on the long end. They're having a hard time offering up paper because they're having a hard time replenishing. Consequently, all these new deals end up doing very, very well."

On Friday, though, the primary market was quiet.

"I think everything else is being shelved until next week," he said.

Sri Lanka, Transnet stand out

Sri Lanka's was among the recent issues to perform well in trading on Friday. The $1 billion issue of 5 7/8% notes due 2022 priced at par to yield Treasuries plus 437.1 bps via Bank of America Merrill Lynch, Citigroup, HSBC and Barclays Capital.

"That did extremely well. We saw quite a bit of interest in that deal once it started trading in the secondary market," a trader said. "People are particularly interested in areas of debt that won't be heavily impacted by Europe, like Sri Lanka and South Africa credits."

Indeed, South Africa-based rail, port and pipeline company Transnet's new $1 billion issue of 4% notes due 2022 - which priced at 98.855 to yield Treasuries plus 262.5 bps - made an impressive showing.

JPMorgan and Standard Bank were the bookrunners for the Rule 144A and Regulation S deal.

"We were very active in the Transnet deal," he said. "It's up about a point from issue price. They were originally talking 285 bps and brought it about 60 bps tighter. So that deal did very well, considering how much they tightened it."

ICA performs

Another deal that performed well on Friday was the $350 million issue of 8 3/8% notes due 2017 from Mexico-based construction company Empresas ICA SAB de CV.

The notes priced at 99.002 to yield 8 5/8% via Bank of America Merrill Lynch, Deutsche Bank and Goldman Sachs in a Rule 144A and Regulation S transaction.

"The deal was small, but it had a broad-based interest from guys involved in Latin corporates," a trader said. "That's up about 3/4-point to a point with some generally broad-based buying."

Ukraine in focus

This week's issue of $2 billion 9¼% notes from Ukraine also performed well in trading, the Connecticut trader said.

"There was strong interest in the deal," he said.

The notes priced at par to yield Treasuries plus 863 bps via JPMorgan, Morgan Stanley, Troika Dialog and VTB Capital in a Rule 144A and Regulation S transaction.

The new issue should go a long way toward alleviating liquidity concerns for the sovereign, according to a report from Barclays Capital.

"Political risks heading into the October elections remain, however, and the liquidity injection does not alter the need to put economic policies on a more sustainable path in the longer term," the report said.

Barclays recommends positioning for further steepening of the spread curve by buying Ukraine's 2013s and Naftogaz's 2014s while also buying five-year credit default swaps against them.

"Selling short-dated CDS also appears attractive for investors looking for outright carry opportunities, in our view," Barclays said.

Tinkoff delays notes again

In other deal-related news, Russia-based credit card lending institution Tinkoff Credit Systems is postponing its planned dollar-denominated issue of notes until the fall, a market source said.

The tenor is likely to be three years.

The company delayed the Regulation S deal once before, pushing it from early to late May.

Tinkoff mandated Citigroup, JPMorgan and VTB Capital to arrange a roadshow in Europe and Asia that ran through May 16.

And on Thursday, Indonesia-based developer PT Kawasan Industri Jababeka Tbk. sold $175 million 11¾% notes due July 26, 2017 at 99.117 to yield 12%, a market source said.

Credit Suisse and Standard Chartered Bank were the bookrunners for the Rule 144A and Regulation S notes, which are non-callable for three years.

China Fishery, SBI ahead

Market-watchers on Friday were also keeping an eye out for two particular deals that are expected to price in the week ahead.

Hong Kong-based China Fishery Group Ltd. is expected to bring to the market an issue of fixed-rate senior notes with bookrunners HSBC, Bank of America Merrill Lynch, Standard Chartered Bank, ANZ Banking Group, Jefferies, Rabo Securities and Deutsche Bank.

And Mumbai-based State Bank of India should price its long-awaited five-year issue of dollar notes.

Citigroup, Barclays Capital, Bank of America Merrill Lynch, Deutsche Bank, UBS and JPMorgan are the bookrunners for the deal.

Inflows decline, still strong

Emerging markets bond fund inflows declined to $935 million for the week ended July 18, according to a report from data tracker EPFR Global.

During the previous week, inflows totaled $1.14 billion. But this week's results were still seen as strong.

"Emerging market bond funds were boosted by strong retail inflows," the report said. "Once again funds with hard currency mandates outgained those with a local currency focus, but by a smaller margin than has been the case in recent weeks."

About 70% of the money flowed into hard currency funds, said Cameron Brandt, director of research with EPFR.

"Retail inflows hit a 23-week high," he said.

EM bonds rally

Inflows have moved into EM bond funds in part due to persistent signs in the global economy, according to another report from Barclays Capital.

"The bid for the U.S. dollar has led to stronger flows into hard-currency bonds than local-currency paper," the report said. "Given the paucity of safe-haven assets, we expect flows into EM to be a structural theme and recommend extending duration in local-currency bonds."

EM external bonds continue to rally, Barclays said, with sovereign bonds reporting a year-to-date return of 9.66%.

That amounts to 6.92% year to date versus U.S. investment-grade credit and 2.48% versus the U.S. Treasury index.

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