EM assets dip, then rally after payrolls data; Lat-Am CDS tighten; Turkey faces uncertainty

By Christine Van Dusen

Atlanta, May 6 – Global risk assets did not at first react strongly to the weaker-than-expected payrolls data released by the United States on Friday, but later in the session they rallied.

“The price action today exemplified the ‘bad news is good news’ environment that currently exists,” a New York-based trader said. “Markets were able to shrug off the lackluster employment report and carry on with the rally.”

Bonds from Latin American moved tighter and higher into the close, following some early-morning weakness, he said.

Brazil’s five-year credit default swaps spreads finished Friday at 341 basis points from 346 bps, even as Fitch Ratings cut its sovereign rating to BB from BB+ as a result of the economy’s contraction and political uncertainty.

Meanwhile, Mexico’s CDS traded at 167 bps after closing Thursday at 170 bps.

“Cash prices move aggressively higher in the thin afternoon trade as offers are lifted across all names and trade inquiry became heavily skewed towards better buyers,” he said. “Lat-Am high yield finishes firm on the session as well.”

Venezuela’s 2027s closed at 42.10 from 41.50, while PDVSA’s 2017s closed at 57.40 from 57.

Argentina’s new 2026 notes ended up at 101.75 from 101.15, he said.

“It’s important to highlight that Argentina’s new issue bonds saw about a 1-point turnaround to the upside in the final hour of trading today,” he said. “[Payrolls have] clearly become second-tier economic data, with currency volume, China, political developments and stock market sentiment now superseding domestic data. It looks like this rally has legs, so long as central banks provide a perpetual put to any sell-off.”

Oi could convert debt

In other news from Latin America, Brazilian telecommunications company Oi SA is said to be negotiating to convert its debt to equity with bondholders.

“According to the company’s management, this is the only way to avoid Oi’s default,” the report said. “Previously, we noted that a 50% to 60% debt haircut is sufficient to return the company back to profitability.”

Turkish PM steps down

Turkey was on radar screens on Friday as the country grappled with political uncertainty stemming from the prime minister’s plan to give up his position.

“This came on the back of a perceived power struggle with President Erdogan, who is undoubtedly striving to transfer more political power to the presidency,” the strategist said. “Moreover, we have seen signals for diverging opinions between the two, especially when it came to the EU-Turkey relationship, the Turkish economy and the role of the central bank.”

This is of concern to investors in part because it could put pressure on the prime minister’s refugee deal, the goal of which is to limit the entry of refugees and migrants to the European Union.

“The deal does not have a direct impact on markets, but we note that when the U.S. and the E.U. imposed sanctions on Russia, Turkey credit was one of the key beneficiaries,” he said. “A Turkey further away from European ideals would be seen as clearly detrimental.”

Turkey turmoil continues

Additionally, a new prime minister in Turkey – one loyal to the president – “would be seen as a signal for more unorthodox economic policies,” the strategist said. “Most notably, Erdogan, his advisors and many of his fellows have demanded the central bank cut rates in order to boost the economy.”

All of this uncertainty has “dented investor confidence, partially regained in first-quarter 2016 and disappearing within a day, in an economy still highly susceptible to its external vulnerabilities, putting potential rating downgrades in the medium term back on the cards,” he said.

Mubadala sets size, tenor

Abu Dhabi-based holding company Mubadala Development Co. PJSC set the size at $500 million and the tenor at seven years for its upcoming issue of notes, a market source said.

A roadshow for the Rule 144A and Regulation S deal concluded on Friday.

BofA Merrill Lynch, BNP Paribas, First Gulf Bank, JPMorgan, MUFG Securities and Societe Generale CIB are the bookrunners.

The deal is expected to price as soon as Monday.

“Mubadala is whetting the appetite of investors, given the technicals around the potential deal,” a trader said. “I already feel the allocation process will be challenging.”

Sun Hung Kai plans roadshow

China’s Sun Hung Kai & Co. Ltd. will set out on May 9 for a roadshow to market a dollar-denominated issue of notes that will be issued concurrent to an exchange offer for its $350 million of 6 3/8% guaranteed notes due 2017, a market source said.

UBS, AMTD and JPMorgan are the joint global coordinators, joint dealer managers and joint bookrunners for the deal. Standard Chartered Bank is a joint dealer manager and joint bookrunner. Sun Hung Kai Financial and China Everbright Securities are co-managers for the Regulation S deal.

The roadshow will be held in Singapore and Hong Kong.

The company is offering new fixed-rate notes due 2021 at the rate of $1,053.75 of new notes for each $1,000 principal amount of existing notes.

In the exchange, the minimum interest rate on the new notes will be announced on May 12 and the final rate and yield on May 23.

Sun Hung Kai said the exchange is being carried out to extend its debt maturities and reduce its ongoing financing costs.

Sun Hung Kai is a Hong Kong-based financial and securities holding company.

CAF draws orders

The final book for Venezuela-based Corporacion Andina de Fomento’s (CAF) $1.25 billion 2% notes due May 10, 2019 that priced this week at 99.991 to yield 2.003% drew a final order book of more than $2.1 billion, a market source said.

The notes came to the market at mid-swaps plus 100 bps, following talk in the 105 bps area.

BofA Merrill Lynch, Citigroup and HSBC were the bookrunners for the Securities and Exchange Commission-registered deal.

The proceeds will be used for general corporate purposes, including funding lending operations.

© 2015 Prospect News.
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