Emerging market debt slips on stronger than expected housing data: Alfa Bank issues new debt

By Reshmi Basu and Paul Deckelman

New York, March 23 - Emerging market debt eased Friday as stronger than expected U.S. housing data forced investors to scale back their hopes that an interest rate cut was in the cards in the near future.

In the primary market, Russia's Alfa Bank sold a two-part offering of dollar- and euro-denominated notes (Baa3/BBB-) under its existing Alfa Diversified Payment Rights (DPR) program.

The issuer sold a tranche of $200 million in five-year notes at par to yield three-month Libor plus 200 basis points, which came in line with initial guidance.

The second tranche was comprised of €145 million of five-year notes, which priced at par to yield three-month Euribor plus 190 basis points. That also priced in line with initial talk.

Dresdner Kleinwort and Merrill Lynch were lead managers for the Rule 144A and Regulation S transaction.

This was the third issuance under the issuer's DPR program.

PDVSA to sell new debt

Also adding to the pipeline, Venezuela's state-owned oil company Petroleos de Venezuela SA will make a combined up to $5 billion offer of three international bond issues due in 2017, 2027 and 2037.

The offer will launch Monday and end Wednesday.

Results of the offer will be announced on April 2 and settlement will be on April 12.

The company will issue up $2 billion each of the 2017 bonds and 2027 bonds and up to $1 billion of the 2037 bonds.

The 2017 bonds will mature on April 12, 2017; the 2027 bonds on April 12, 2027; and the 2037 bonds on April 12, 2037.

Proceeds will be used for capital investments.

Primary market plays catch up

Despite Friday's activity, issuance of new deals has been slacking, given the disruptions to activity this week such as Wednesday's Federal Reserve Open Market committee decision. Moreover the primary market has yet to bounce back from the prolonged sell-off that occurred nearly a month ago.

One buyside source expressed reluctance to add more risk, particularly corporate debt. Instead the source has chosen to sit on cash.

Another source noted that this was a sweet time for issuers to tap the market, given that either the U.S. economy slows down so spreads widen or the U.S. economy speeds up so bond rates rise.

But one emerging market analyst noted that while the primary market for more exotic names has been recovering there is still a way to go to return to the situation earlier in the year.

"We had so much issuance from low-rated, off-the-run EM corporate names over the last few months, and those deals generally did so poorly in the recent sell-off, that I think a lot of investors would rather wait a while longer to be sure that another wave of selling isn't ahead.

"For better issuers, though, the primary market is rapidly improving. Issuance has been minimal for the last four weeks, which has helped the market digest a lot of the issuance in January-February," he said.

One such good example of this recovery is Thursday's new deal by Panama. The Central American nation reopened its 6.70% amortizing global bonds due 2036 (Ba1/BB/BB+) to add $450 million via Morgan Stanley.

The retap priced at 103 3/8 to yield 6.437%, which came in line with initial guidance.

Panama had initially offered to sell an additional $300 million of the bonds, but upped the size of the deal due to substantial demand.

The analyst noted that the deal was successful because "a solid name came to market and was able to get its deal upsized.

Meanwhile in trading, the 2036 bonds were spotted at 103.15 bid, 103.55 offered, up 0.05 from the previous session's close.

"April will probably see further recovery, though I still think single-B issuance is going to be a lot more constrained," the analyst concluded.

Risk appetite curbed by housing data

Returning to the broader market, emerging market debt retraced gains on a dollar basis amid a cautious session Friday as surprisingly strong U.S. housing data took some enthusiasm out of the market's recent rally.

Friday's release showed an unexpected jump in existing U.S. home sales, which pushed investors back to the sidelines as they once again reassess Fed policy, according to a market source.

On Wednesday, emerging markets surged after the Federal Open Market Committee released a more hawkish statement accompanying its decision to keep rates steady at 5¼%, which raised speculation that a rate cut would occur sooner than later. On that news, global equity markets rallied as risk aversion decreased.

"But timing of a Fed move will depend on [U.S.] economic data, and today's [Friday] release continues the wave of mixed data," said the market source.

"So investors, who came out to play, are back to the sidelines," he added,

And despite Wednesday's bullish run, very few investors appeared to have actually returned to the game, according to this week's bond flow data.

Dedicated emerging markets bond funds saw muted inflows of $43 million for the week ending March 21, reported EmergingPortfolio.com Fund Research.

Mexico keeps rates steady

In other news, Mexico's central bank kept its benchmark rate at 7%, but suggested that there may be further rate hikes ahead to curb inflation.

In trading, the Mexico bond due 2026 gave up 0.05 to 163 bid, 163.75 offered.

Elsewhere, Colombia's central bank lifted its key interest rate by a quarter percentage point to 8¼%, in an effort to rein in inflation.

During the session, the Colombia bond due 2033 was unchanged at 145 bid, 146 offered.

Among benchmark names, the Brazilian bond due 2040 gave up 0.15 to 134.60 bid, 134.70 offered. The Russian bond due 2030 was unchanged at 113.50, 113.75 offered. And the Turkish bond due 2030 eased 0.13 to 154.375 bid, 154.625 offered.

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