Hungary prints notes; EM assets stay resilient despite euro zone, Middle East worries

By Christine Van Dusen

Atlanta, March 24 - The Republic of Hungary sold notes on Thursday as emerging markets assets stayed fairly solid - and risk appetite fairly healthy - in the face of growing worries about the euro zone, as well as continued concern about the Middle East and Japan.

"Price action in EM assets has again been relatively subdued," according to a report from RBC Capital Markets. "Attention has shifted from Japan and the Middle East to Europe."

The JPMorgan Emerging Markets Bond Index Plus spread finished the day 7 basis points tighter, Argentina down by 33 bps, Venezuela by 12 bps and Ukraine by 17 bps.

"A risk-on mood globally supported continued strength in EM assets on Thursday, as markets generally seem to be becoming less sensitive to bad news flow," according to a report from RBC Capital Markets.

Euro zone woes continue

The big news out of the euro zone on Thursday was that Portugal prime minister Jose Socrates was stepping down after the parliament rejected his proposed austerity measures.

"Although this development was largely anticipated, concerns about E.U. sovereign debt have also escalated in response to news that E.U. leaders will postpone to June any decision about extending the EFSF and reports that Moody's may downgrade Spanish banks," RBC said.

Still, it was a relatively strong morning for EM, a London-based trader said, particularly in the Middle East.

"There's an amazing ability to shrug off the news stories in the global markets," he said.

Said another London-based market source: "It's all old hat for EM."

Hungary does deal

In its new deal, Hungary priced a two-tranche issue of notes due 2021 and 2041, a market source said.

The Securities and Exchange Commission-registered deal included $3 billion 6 3/8% notes due March 29, 2021 that priced at 99.062 to yield 6.504%, or Treasuries plus 310 bps. The notes were talked at a spread in the Treasuries plus 325 bps area.

The second tranche totaled $750 million 7 5/8% notes due March 29, 2041, which came to market at 98.084 to yield 7.791%, or Treasuries plus 330 bps. The notes were talked at a spread in the Treasuries plus 345 bps area.

The initial guidance on the 10-year notes looked to be about 20 bps cheap, a market source said.

"These are going to be [the] first new issues under the new government, and the 30-year issue is going to be the first 30-year benchmark deal in the convergence space," he said.

Despite Hungary's status as the most indebted member of the Eastern European Union, the deal attracted a somewhat bewildering feeding frenzy, a market source said.

"That was up a half-point in the gray," he said. "These guys are at the year tights, the government is struggling to implement budget cuts and it's really that desirable?"

He chalked that up to a fairly healthy appetite for EM across the board.

Mriya Agro talks notes

Hoping to capitalize on that healthy appetite is Ukraine-based agriculture producer and trader Mriya Agro Holding plc, which set price talk for its $200 million offering of five-year notes at 11% to 11¼%, a market source said.

Merrill Lynch, RBS and UBS are the bookrunners for the Rule 144A and Regulation S notes, which include a change-of-control put at 101%.

"Mriya has wised up and is now looking to print $200 million at over 11%," a market source said. "Now it's starting to perhaps get interesting."

The company, he said, "currently looks like a good business, but you need to get paid for lots of tail risk, such as changes to export quotas, MENA exposure and execution risk. They are clearly hoping to sneak this in before Ferrexpo comes along."

Ferrexpo plc, a Swiss-based resources company with assets in Ukraine, will set out on Friday for a roadshow to market a five-year dollar-denominated offering of notes via JPMorgan, Morgan Stanley and UBS.

"The iron ore company is hoping to gain from the amazing repricing of Ukraine corporate risk that Metinvest achieved," a source said.

Middle East trading firm

There continued to be a firm tone in trading of Middle Eastern names, the London-based trader said, with Dubai and Abu Dhabi leading the way.

"There have been some decent week-on-week moves here, and while we pointed out last week there was some value in the market, it's getting to a stage now where a lot of that value has been squeezed out," he said.

Abu Dhabi's sovereign, corporate and quasi-sovereign bonds were about 10 bps tighter during the European afternoon.

"We've seen some serious buying of Abu Dhabi names in the past two sessions, with the belly of the Abu Dhabi National Energy Co. curve a good 15 to 20 bps tighter," he said.

Abu Dhabi's Tourism Development & Investment Co. was "also a rock," he said, "with the sukuk for a change lagging."

Emaar, IPIC active

The Emaar Properties sukuk bounced back on Thursday. "That's just under par now," he said, "versus lows of nearly 97 a few weeks back."

And the 2015 and 2020 dollar bonds from Abu Dhabi-based oil investment entity International Petroleum Investment Co. were well bid. The 2015s were seen Thursday at 97.37 bid, 97.87 offered while the 2020s were trading at 96.50 bid, 97 offered in the morning and 96.62 bid, 97.12 offered in the afternoon.

Names in Africa were well sought after on Thursday, the London trader said.

"The long end of South Africa's sovereign curve is flying," he said. "Even the dollar 41s are finally getting some traction."

Those notes were seen trading Thursday at 101.50 bid, 101.80 offered.

Nigeria, though, felt "a little vulnerable" on Thursday, he said. "But Gabon and Ghana are relentless in their march tighter."

Turkey stabilizes

Turkey, which on Wednesday saw a wave of selling across sovereign and bank names after the central bank raised the reserve ratio, was stable on Thursday.

Most of the country's bonds opened unchanged, a market source said.

"While the central bank's reserves hike caused a shock yesterday, the move is believed to be bold enough to sustain the bank's credibility," he said. "Although the banks' equities have been getting hammered since the reserves decision, their eurobonds are well supported now on the street."

LatAm bonds climb

In other trading on Thursday, Argentina, Venezuela and state-owned oil company Petroleos de Venezuela SA (PDVSA) saw their bonds move higher.

"The bonds are trading at the highs of the days and are up 0.75 to 1.25 points on the day," a New York-based market source said.

Argentina's Boden 15s were seen at 97.35 and Venezuela's 22s at 86.15.

"The chase for extra yield, the move higher in equity markets and the increase in risk appetite helps these credits outperform," the source said.

Asian issuers plan notes

Hong Kong-based coal importer Winsway Coking Coal Holdings Ltd. will embark on a roadshow starting Monday for its planned issue of dollar-denominated fixed-rate senior notes, a market source said.

Deutsche Bank AG, Singapore Branch, Merrill Lynch International, Goldman Sachs (Asia) LLC and ICBC International Capital Ltd. are the bookrunners for the Rule 144A and Regulation S deal.

Winsway will use 60% of the proceeds to finance investments in rolling stock, other transportation-related vehicles and railway-related infrastructure, 25% to finance investments in upstream resources through new acquisitions and/or joint venture projects and to otherwise secure upstream supplies, and 15% for working capital and general corporate purposes.

Also from Asia, the Vietnam Bank for Industry and Trade (VietinBank) plans to issue between $500 million and $1 billion of notes this year, a market source said.

Barclays Capital, Credit Suisse, Goldman Sachs and JPMorgan are the bookrunners for the deal.

Woori Bank plans roadshow

And South Korea-based lender Woori Bank is planning a roadshow starting Monday for an issue of dollar-denominated lower tier 2 notes, a market source said.

Barclays Capital, BNP Paribas, Merrill Lynch, HSBC, JPMorgan, UBS and Woori Investment & Securities are the bookrunners for the Rule 144A and Regulation S deal.

In other news from Asia, the final book for China-based KWG Property Holding Ltd.'s $350 million notes due March 30, 2016 - which priced Wednesday at par to yield 12¾% - was $1 billion, a market source said.

Citigroup, HSBC and Standard Chartered were the bookrunners for the Regulation S deal, which priced in line with talk of 12¾%.

About 88% of the orders came from Asia, 10% from Europe and 2% from U.S. offshore. Private banks accounted for 48%, fund and asset managers 30%, banks 12% and corporates 10%.

Odebrecht plans 12-year notes

Also on Thursday, Brazil-based business conglomerate Odebrecht Finance Ltd. set the tenor for its planned issue of dollar-denominated notes at 12 years, a market source said.

Merrill Lynch and HSBC are the bookrunners for the Rule 144A and Regulation S notes, which are expected to price by the end of the week.

Proceeds will be used to purchase notes in connection with a tender offer and for general corporate purposes.

Investor caution urged

In the current economic and geopolitical climate, emerging markets investors should consider a more cautious approach, according to "Global Outlook: Winding Down the Recovery Trade," a new report from Barclays Capital.

Though in 2009 Barclays recommended that investors overweight risky assets, the company now recommends more neutral positions.

"We are no longer in an environment where confirmation of the sustainability of economic recovery reduces risk premiums and generates a revaluation of cheaply priced assets," said Larry Kantor, Barclays Capital's head of research, in the report. "Instead, asset prices are closer to fair value and stronger growth is now accompanied by signs of higher inflation and an increased probability of policy tightening.

"This means that markets are more likely to be choppy than trending, and that investors will need to pay more attention to timing, as well as to asset and country selection."

Kantor now favors equities over bonds, and developed markets over emerging.

"We favor developed market equities because there is more room for economic growth without triggering significant policy tightening," he said.

Inflation a concern

Inflationary pressures are continuing to build in EM, according to the Barclays report, and monetary policies have so far not been adequately adjusted in response.

"With monetary tightening on the agenda, equity and local bond markets are set to struggle," the report said. "We adopt a neutral outlook for EM risk and look for cost-effective hedges against tall risks."

Kantor also assessed the impact that the recent events in Japan and the Middle East are likely to have, longer term, for the markets.

"While we acknowledge that they have added greatly to uncertainty, we do not expect them to be significant drivers of markets in the coming months," he said. "Growth in Japan is likely to suffer a sharp decline in the near term, but we expect reconstruction later in the year to bring the overall level of activity back to roughly where it would have been otherwise by the end of the year.

"Meanwhile, oil prices have risen as a result of the loss of supply from Libya as well as the risks of more extended supply interruptions. While prices may rise somewhat over the next few months, there is still some spare capacity and our base case is that supplies will not be curtailed significantly further. At this point, we do not see the rise in oil prices as putting the recoveries in economies or markets seriously at risk."

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