Light trading, no new deals ahead of housing data; sukuks gain favor; PLN ponders offering

By Christine Van Dusen

Atlanta, Aug. 23 - In the midst of the summertime slowdown, volumes were thin and new issuance non-existent in emerging market debt, though several issuers mulled bringing deals - in particular, sukuk issues - to market in the coming months.

"People are still on holiday it looks like," an emerging markets strategist said. "It's very quiet. There's not a lot of activity."

Market-watchers were primarily tracking developments in "developed equities, where conditions are pretty flat. The market gave up most of its gains today," he said.

Also on investors' minds is U.S. housing data due Tuesday from the National Association of Realtors, which is expected to report that sales of existing homes fell in July. Similarly negative new-homes data is expected Aug. 25 from the Commerce Department.

"Tomorrow we'll be looking at the housing numbers," the strategist said. "Outside of that, there isn't much that suggests there's going to be a shock to the market, unless there's some unexpectedness."

Overall, "conditions are still a bit vulnerable," he said. "My tone is not overall positive at the moment. I think investors are somewhat risk-averse right now."

Venezuela paper in demand

Trading volumes on Monday were "pretty light," the strategist said. "Everything's mostly tracking Treasuries. It's pretty dull."

A Connecticut-based trader agreed. "There's very, very little going on. I would say close to 50% of the market is on vacation, so the trade volumes are significantly lower than normal."

But there still was "strong demand" for the $3 billion 12¾% notes from Venezuela that priced Aug. 10 at par via Credit Suisse and Deutsche Bank, the trader said.

"They're in strong demand as bonds come out from locals because of the high coupon," he said. "Guys are interested in this deal because of the nice, attractive current yield."

Argentina, meanwhile, was "in a holding pattern" while the market waited to see if the sovereign will issue new debt in early September. "But bids are strong. And we're not seeing anything in terms of profit-taking either," the trader said. "So it's steady as she goes."

Inflows reported again

The flows seen on Monday were "related to the small amounts of money entering the market, usually through emerging market bond index funds or EM EPF guys who are buying bonds to hitch to their portfolios," the trader said. "Small amounts of money are being put to work. They're adding in various corporates and sovereigns. That's a consistent theme of the last two weeks."

Indeed, the week ended Aug. 18 saw flows into - not out of - emerging markets bond funds, according to data tracker EPFR Global. But the total marked an 11-week low "as the spread between U.S. Treasuries and JPMorgan's benchmark EMBI+ index tested the 270 basis points level," the company said in a report.

Still, the funds managed to extend their year-to-date record inflows to $32.8 billion, "which trounces the previous full-year record inflow of $9.7 billion set in 2005," EPFR said in a report.

PLN considers deal

In other news, the total book for the $500 million 5¼% notes issued last week by Hong Kong-based telecommunications holding company PCCW Ltd. - which priced at 99.607 to yield 4.331% - was more than $6 billion, a source said.

About 300 investors participated, with 74% from Asia and 26% from Europe.

Funds accounted for 57%, private banks 22%, other banks 10%, and insurance and others 11%.

This was one of the few deals to get done before the summer doldrums really set in. At this point, the primary market is "on hold until September, until everyone gets back," the trader said.

But some issuers did ponder possible deals.

Indonesian state-owned electricity company PT Perusahaan Listrik Negara (PLN) is considering a $1 billion offering of notes due 2020, according to a market source.

The deal could come to market in 2011, the source said. No other details were available on Monday.

Sources also were whispering about a possible $1 billion deal from Brazilian utility company Electrobras and a 10-year deal from Mexico.

Bahrain also is said to be looking at a deal, though the sovereign could be hamstrung by a recent downgrade from Moody's Investors Service.

And Qatari Diar Real Estate Co. could come to market with a five-year sukuk issue of notes, capitalizing on the recently healthy demand for Islamic bonds.

Sukuks in fashion

A new report from Kuwait's KFH Research Ltd. said sukuk issuance is growing in popularity and could total as much as $30 billion this year, up from $24.65 billion in 2009. Already new issuance has totaled $16.5 billion, more than twice as much as at this time last year - notable, given that sukuk issues lost some luster after some big-name defaults.

The primary reason for the growth in Islamic bonds is the fact that sovereigns in the Middle East are planning development projects that need funding, the report said. The market is driven by "the recovery in global economic activities, record low interest rates, continued sovereign fundraising to support economic growth, as well as revival of private sector projects."

And investors are showing a "growing preference for Shariah-compliant products," particularly "after the subprime crisis" in the United States, KFH said. Also favoring sukuk issues is "massive liquidity from emerging markets" and "greater understanding of sukuk instruments."

Issuance is expected to come from beyond the Middle East, with potential deals from Japan, Thailand, Turkey, the United Kingdom and Russia.

Sukuk issuance totaled $15.46 billion in 2008.

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