Oil prices hurt EM bonds; civil charges filed against Vale; Eastern Property prices notes

By Christine Van Dusen

Atlanta, Dec. 11 – Emerging markets bonds continued to feel the pain of falling oil prices on a quieter Friday, with wider spreads for most names in the asset class and sellers seen for Latin American notes.

“The oil price drop is still a strong factor for the decline in emerging market assets,” according to a report from Schildershoven Finance BV. “We don’t expect any positive industry dynamics in the nearest future.”

Oil prices continue to be depressed by headlines from the Organization of Petroleum Exporting Countries, which said that production rose to a three-year high in November, a London-based strategist said.

“Last Friday, OPEC members failed to agree on an effective production ceiling, among others, because Iran’s output will surge once the sanctions are lifted,” he said. “This morning, the IEA said that it expects the oil glut to continue until at least late 2016.”

South Africa also remained under pressure, following the surprise firing of the finance minister, which “caused turmoil across all asset classes,” he said.

On Friday morning, five-year credit default swaps spreads for the sovereign were trading at 350 basis points. They were trading at 290 bps on Wednesday evening, he said.

Investors were also watching Bahrain, which was being eyed by Standard & Poor's and Moody's Investors Service.

Both ratings agencies “already cut Bahrain by a notch earlier this year, and we think that a further downgrade to junk is in the cards, with fiscal deficits and government debt levels continuingly deteriorating that have substantially increased the borrowing costs of the sovereign,” the strategist said.

Fitch Ratings is also set to review Lebanon. On Friday, Standard & Poor's affirmed Ukraine's ratings with a stable outlook.

Quiet, wider trading

Looking to the Middle East, trading was “quiet and painful,” a London-based trader said.

Kazakhstan, meanwhile, was wider by 5 bps.

And Turkey was wider by a couple of bps, he said.

Vale faces charges

From Latin America, prosecutors are bringing civil charges against Brazil-based Vale SA, BHP Billiton and their iron ore mine, Samarco, after a dam burst last month and killed 13 people.

This came as Vale and BHP decided not to sign an accord.

“The civil action requires funds to be made available to provide adequate housing for victims,” according to a report from Schildershoven Finance BV. “The company is to prepare over $80 million for compensations. We don’t expect this news will substantially influence Samarco’s and its shareholders' bond performance, as the main concern is the potential claim in the amount of $10 billion for water pollution.”

‘Tough day’ for Lat-Am

Bonds from Peru experienced continued weakness, which carried over from Thursday afternoon, and were well-offered, a trader said.

Overall, it was a “tough day” for Latin American debt, another trader said, with wider spreads and cash prices “under pressure from the get-go.”

Brazil's five-year credit default swaps spreads finished the session at about 500 bps from 485 bps after trading as wide as 502 bps. Mexico's ended the day at 187 bps from 177 bps.

“Cash prices were well-offered throughout the session and largely disregarded any movement in the rates markets and instead focused on spread widening and general risk-off tone,” he said.

Venezuela sells off

Venezuela saw its bonds continue to sell off while Argentina's moved only slightly lower, the trader said.

PDVSA's 2017s closed at 56.25 from 59.25 and Venezuela's 2027s moved to 42.50 from 47.

The difficult market conditions kept issuers like Argentina-based Medanito SA from bringing new deals this week, another trader said.

The oil and natural gas company was expected to print up to $150 million in notes this week via Itau BBA and UBS Investment Bank in a Regulation S deal. A roadshow ended on Dec. 8.

Eastern Property sells bonds

Also on Friday, Russia-focused Eastern Property Holdings Ltd. sold $50 million of nine-year bonds at par to yield 6¾%, according to a company announcement.

Valartis Bank was the bookrunner for the deal.

Eastern Property is a Swiss-listed, British Virgin Island-based real estate development and investment company focusing on Russia. It is managed by Valartis International Ltd., a wholly owned subsidiary of Valartis Group AG.

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