New issuance muted, volumes thin as market worries about Egypt; Ukreximbank adds to supply

By Christine Van Dusen

Atlanta, Jan. 28 - Violent protests in Egypt captured the market's attention on Friday, leading to little in the way of new issuance and a rise in risk aversion as investors worried which country could be next to experience political upheaval.

In the midst of the chaos, Ukraine's Ukreximbank snuck in a hryvnia-denominated issue of notes due 2014.

But most issuers and investors stayed out of the fray, worried that the trouble could be contagious. Even far-away Argentina and Venezuela suffered on Friday.

"They were down 4% and 2%, respectively, on the JPMorgan Emerging Markets Bond Index Plus," a market source said. "There's been some contagion in Africa, and we've seen spreads widen by 20 bps to 25 bps."

Though there was some heavy trading in London at that market's open, activity tapered off through the day. "Most investors remain of a cautious mindset," according to a report from RBC Capital Markets.

Risk appetite has decreased significantly, a California-based market source said.

"There hasn't been a lot of trading," she said. "Obviously the situation in Egypt is what everyone is focused on today. That's causing significant weakness across all asset classes."

Ukreximbank prints notes

The market was also busy digesting the recent spate of new issuance, a market source said.

Still, Ukraine's state-run import-export bank, Ukreximbank, managed to price UAH 2.39 billion - or $300 million equivalent - of notes due Feb. 3, 2014 at par to yield 11% via Credit Suisse, Citigroup and Deutsche Bank.

The Regulation S notes are payable in dollars.

"That was surprising, that they did that with everything that's going on," the California-based source said. "But they were able to pull it off."

Egypt's spreads widen

But most eyes remained trained on Egypt, with yet another day of violent protests against president Hosni Mubarak and news that police detained senior members of the opposition group known as Muslim Brotherhood.

"The situation in Egypt is clearly tense, at best," a London-based market source said. "Credit default swaps print north of 400 bps; bond spreads move wider."

The Egypt 2020 bond was seen trading at 94 bid, 95 offered, more than 100 bps wider on the week.

"This credit obviously remains the main focus of the MENA region at the moment, dislodging Tunisia from that title," the London source said.

Contagion effect feared

Investors are now wondering whether the trouble is contagious and will spread, said Gavan Nolan, an analyst with Markit, in a report.

"The last few days have shown that the contagion scenario is more likely than it seemed last week," he said. "Credit investors have taken note, and [Egypt's] spreads have widened."

Widening has also been seen in the spreads for Lebanon, Jordan and Saudi Arabia, Qatar and Bahrain, he said.

"Even Israel, a liquid name, has seen its cost of protection rise sharply today," he said. "One might ask why spreads should widen in a country that is the only democracy in the region. But Egypt is Israel's closest Arab partner, and the fall of Mubarak could leave it isolated if the dictator is succeeded by a less-friendly regime. Investors are starting to price in this risk."

Nolan argues that the markets may have failed to price in enough risk in the past for emerging markets. "Investors have been focused, rightly, on the improving economic fundamentals of many countries in the less developed world. But politics matters, particularly with sovereigns with unstable, undemocratic systems," he said.

It's likely the markets will begin to differentiate between the countries and price appropriately, he said. "But much will depend on how the Egypt story develops and whether the contagion effect swamps attempts at more discerning analysis."

Street 'nervous'

Morocco's 2020 notes were seen Friday at 91.5 bid, 92 offered while Jordan's 2015s were seen trading at 91.75 bid, 92.50 offered.

"Plenty of people are asking on these names lately," a London-based trader said. "It's still a fairly nervous street; however, I would say Tunisia and Morocco are starting to trade a little better."

Tunisia is off 10% on the year, he said, while Morocco is actually up about 5%.

Meanwhile, the $500 million sukuk notes due 2016 from Dubai's Emaar Properties that priced Wednesday at par to yield 8½% were seen trading at 99.50 bid, 100.20 offered before closing at 99.57 bid, 99.77 offered.

"We traded a few good clips of the new Emaar '16," the London-based trader said, noting there was some retail demand in Asia during the morning.

He also saw two-way flow on Qatar National Bank's 2015s, which closed at 98 bid, 98.50 offered. And Kuwait's Kipco is "well sought after as the squeeze continues on the 2016s and 2020s," he said.

Abu Dhabi National Energy Co. paper remained in demand, with reasonable liquidity, he said. The issuer's 5.62% 2012 notes - which were seen trading at 104.90 bid, 105.20 offered on Tuesday - were at 104.85 bid, 105.15 offered on Friday.

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