Emerging markets debt sustains late-session drop; Russian energy sector still underperforms

By Paul A. Harris

St. Louis, May 24 - Emerging markets showed some strength during the New York trading session, according to a debt capital markets banker in New York.

However, late in the afternoon quality names widened by about 5 basis points, and higher-beta credits dropped in price by about a point, the source added.

The session in Europe was muted, owing to the fact that some countries had a holiday on Monday, according to a London-based trader.

There was some stability in oil prices, the stock market and the volatility index, the trader observed, as the London market headed toward its Monday close.

"However, liquidity is shot to pieces, especially in central Europe," the trader added.

"If you add to that the fact that things are extra quiet because of the holiday, I'm afraid it's very difficult to read anything into today's activity.

"I don't think there has been any reduction in volatility."

Oil sector underperforming

With recent drops in oil and gas prices, the big Russian oil companies, OAO Gazprom, TNK BP and OAO Lukoil, have been conspicuous underperformers, the London-based trader said.

"You're seeing better sellers among the crossover accounts, rather than from the dedicated emerging markets accounts," said the trader.

"That, of course, makes sense, because in all of this volatility people are naturally wanting to stay closer to home."

Gazprom five-year credit default swaps were 300 bps bid heading into the London close on Monday, unchanged from Friday's close.

However, amid last Friday's volatility Gazprom five-year CDS blew out to 365 bps bid before rallying back late, the trader said.

To characterize the extent of Gazprom's - and by extension, the Russian oil sector's - recent moves, the trader said that Gazprom's five-year CDS were trading at 200 bps bid at the end of April.

As recently as last Thursday, Gazprom five-year CDS were 275 bid, 280 offered, the trader added.

Turning to sovereign paper, Russia's five-year CDS closed Monday at 190 bps bid, compared to Friday's close of 200 bps bid.

Russia's sovereign five-year CDS traded to 230 bps bid, at the wide, on Friday, the trader added.

A look at the damage

Another market source in Europe took a look at month-to-date performance of some liquid emerging markets names.

Brazil's five-year CDS were 150 bps mid late in the European afternoon, 33 bps wider since the last day of April, according to a market source.

Mexico's five-year CDS were 150 bps mid, 38 bps wider since the last day of April.

Russia's VTB Bank five-year CDS were 336 bps mid, 65 bps wider on the month.

Meanwhile, moves of the higher-beta credits have been more dramatic, the source added.

Venezuela's five-year CDS were 1,421 bps mid late Monday afternoon in Europe - 577 bps wider since the last day of April.

Dormant primary

The primary market failed to generate any news on Monday, which was no surprise to the market sources who spoke to Prospect News.

A substantial pipeline of mandated deals awaits a sustained decrease in volatility, a New York-based syndicate official said.

The roadshow for Russia's Mobile TeleSystems wrapped up last Friday, according to a source close to the deal.

Despite news reports Friday, and again on Monday, that the deal had been pulled, it definitely remains in the market, the source added.

No size or guidance has emerged, the official added.

There have been strong indications from accounts, the official said.

Bank of America Merrill Lynch, Credit Suisse and RBS are leading the deal.

Earlier in the session, a debt capital markets banker in London said that Mobile TeleSystems is a deal that could get done, even in the present circumstances.

"It's a high-quality credit, and the issue can work," said the banker. "It's just a matter of whether they are willing to pay the price."

Another deal that could get across the finish line is the dollar-denominated offering from Indonesia's Indosat, being led by Citigroup, DBS Bank Ltd., Deutsche Bank, HSBC and RBS, the banker said.

That deal also appears to still be in the market, sources say.

A roadshow also wrapped up recently for a dollar-denominated deal from the Russian Federation's Sberbank, a Europe-based debt capital markets banker said.

However the sledding is tougher, right now, for the financial sector in light of the credit difficulties in Europe, the banker counseled.

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