Japan tragedy, Middle East turmoil reduce trading volumes, halt issuance; IPIC in focus

By Christine Van Dusen

Atlanta, March 14 - The market's focus on the fallout from Japan's devastating earthquakes - as well as continued turmoil in the Middle East on Monday - had emerging markets investors and issuers nervous and waiting for a break in the tension before taking any action.

"There's too much uncertainty going on all over the place to get anyone motivated to make a move either way," a New York-based trader said. "The market will stay in a holding pattern until we get some kind of news that gives us some direction."

The JPMorgan Emerging Markets Bond Index Plus spread barely moved in response, tightening by just 2 basis points to Treasuries plus 259 bps.

"The markets are more worried than anything else," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "No one knows what the effects will be, coming off of Japan. Equities are soft across the board, and as far as debt prices go, you've seen a little more of what you could qualify as a flight to safety."

Trading was light and mixed, a London-based trader said, with a continued focus on Abu Dhabi-based oil investment entity International Petroleum Investment Co.'s £550 million and €2.5 billion notes that priced March 9.

"We saw a good start to the week for that paper, but it faded as the day went on," he said. "Activity is below average and very limited."

IPIC rises, then slips

The IPIC deal included £550 million 6 7/8% notes due 2026 that priced at 99.506 to yield Gilts plus 270 bps and €1.25 billion 4 7/8% notes due 2016 that priced at 99.379 to yield OBL plus 244.8 bps.

The company also priced €1.25 billion 5 7/8% notes due 2021 at 98.737 to yield DBR plus 276 bps.

Goldman Sachs, Banco Santander, BNP Paribas, Credit Agricole, Deutsche Bank and UniCredit were the bookrunners for the notes.

"They tried to rally, but then they simply couldn't match the government move," the London-based trader said. "The 2016s at one point got back to the launch spread only to fade back out to close at OBL plus 250 bps on the bid side. The one small positive was retail starting to dip their toe, especially on the 2016s."

MENA somewhat firm

In general, issuers from the Middle East and North Africa were holding in fairly well on Monday, primarily because there are no insurers in the bunch, another London-based market source said.

There was some interest in Gabon, where the bonds were trading at 113 bid, 113.75 offered.

"Ghana remains about Z spread plus 110 bps north of Gabon," the London trader said.

He was also watching Egypt's 2020 bonds, which were "dull" at 92 bid, 92.75 offered after trading Thursday at 92.25 bid, 93.25 offered.

"It also feels like there's some support for Qatar names, but buyers are happy to sit on the bid and wait to be hit," he said. "You can't really blame them in this market."

Said the other London-based market source: "There's an incredibly measured reaction by the EMEA markets."

Only Bahrain saw some marked weakness, widening by 25 bps as troops from Saudi Arabia moved armored carriers into a Sunni Muslim area.

Russian lenders trade up

In other trading on Monday, Russia was quiet while Ukraine and Kazakhstan were firm, the London market source said.

He pointed to the new $500 million issue of notes due 2014 from Russia-based lender Home Credit and Finance Bank LLC, which priced Friday at par to yield 7% via Citigroup and Credit Agricole in a Regulation S-only deal.

"The new HCFB deal is moving along nicely, up 30 cents," he said.

And the RUB 20 billion notes due 2016 from Moscow's OJSC Russian Agricultural Bank - which came to market Friday at par to yield 8.7% with Deutsche Bank, JPMorgan and VTB Capital in a Regulation S deal - were also doing fairly well.

"That's holding firm, up about a half-point," he said. "Turkey is still performing very well, with good demand for sovereign and bank paper. With names like Akbank TAS now 150 bps over the sovereign, the sector looks like [a] good value."

LatAm mostly softer

In looking at Latin America, Peru was slightly softer on Monday, given its status as a commodity exporter. The 2037 bond was trading at 110.50, wider by 6 bps.

"Uruguay isn't in the mix of commodities exporters and is more linked to Brazil and Argentina, but I think it gets dragged in because it's a small credit and lower rated," Alvarez said. "The 2036 bond is 1183/4, wider by 6 bps."

The moves aren't sizable, he said, given the market's current preoccupation.

"The market is confused, more than anything," he said. "The market is in a state of flux."

Investors aren't rushing to sell; they're just waiting for a number of cues. One cue in particular: If the Japanese currency strengthens, that could increase inflows into Japan.

"Those inflows would be from insurance sources, covering losses," he said. "Once that psyche takes over, then probably the next step will be overflows into the U.S. Treasury realm, with Japan being a very large buyer of U.S. Treasuries. It's not that they would liquidate their position - that would necessitate a very stressful circumstance - but they'll probably be absent from U.S. Treasury auctions going forward. That's where the effect for Latin America comes in, when you start speculating on higher rates."

Issuance on hold

Meanwhile, the primary market was all but closed on Monday.

"It's a very bad time for issuers," Alvarez said. "I don't think anyone would want to do a deal, realistically. We just had a G7 country suffer a catastrophe of historic proportions and you don't want to test those waters at this point in time.

"The support may or may not be there, but this is a pretty bad time to front-run the market," he said.

The scene could change if a number of supportive economic indicators fall into place, he said.

"As it dissipates the climate might be a little bit better," he said. "With rates falling in the U.S., that favors that activity if you want to tap the market. But it's all about timing. I would doubt that there'd be finance ministries out there willing to try to tackle this right now.

"It's probably not good to get your feet in the water at this point in time."

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