Greek worries hamper issuance, but EM assets remain strong; KNOC taps leads for roadshow

By Christine Van Dusen

Atlanta, Sept. 12 - As the possibility of a default by Greece loomed larger and investors worried about the euro zone's economic strength, spreads widened and primary market action halted on Monday. Still, emerging markets debt managed to perform relatively well.

"EM is proving its mettle once again, putting in a great performance while the rest of the world implodes," a trader said. "Another way to explain the outperformance is that Greece defaulting is no surprise to the EM community, while it seems to still be news elsewhere."

Most risk assets sold off sharply at the start of the trading week as a result of the Greece story, according to a report from RBC Capital Markets.

"The Greek government approved further fiscal measures over the weekend but E.U. support for further assistance, particularly in Germany, is clearly wavering, increasing pessimism that a disruptive resolution to the crisis cannot be avoided," the report said.

In response, credit default swap spreads widened on Monday, with the JPMorgan Emerging Markets Bond Index Plus spread adding 5 basis points to Treasuries plus 359 bps.

"Obviously most people are sitting on their hands, hoping this passes," a trader said.

Still, many emerging markets remained resilient on Monday, with some bid-hitting and spread-widening in the Middle East and Africa but no panicking, he said.

"It's still quite apparent where the Street shorts are, and so far these shorts are not being filled as real money is not selling any holdings as of yet and dealers, for the most part, have similar books," he said. "For the record today, I'd call the market 5 to 10 bps wider, which in this environment is solid."

The market remains technical, another trader said, and frustrating.

"It's difficult to shift longs, but against that it's tricky covering shorts," he said.

Middle East names get support

In trading, demand was noted for longer-dated bonds from Qatar, including Qtel International. And Emirates' 2016s closed at 99.25 bid, 99.50 offered, or 2 bps wider. Dubai's 2014s closed unchanged, following some decent buy orders.

The Abu Dhabi National Energy Co. curve was well supported on the long end while the 2012s, 2013s and 2014s were well offered. Bahrain's 2020s closed 7 bps wider, and Kuwait's Kipco was a relatively decent 10 bps wider on the day.

"So all told, while the global backdrop continues to feel awful, for the most part, this market continues to hold in," the trader said. "Flow-wise, we've seen sellers of HSBC Middle East, two-way on Qtel and buyers for Emirates and Emaar Properties."

Most EM names stay firm

The trader also noted buyers for Egypt's paper.

"Egypt bonds are still well-bid despite the situation on the ground over the weekend," he said. "The 2020s last were up near the 102.625 level."

Cairo's African Export-Import Bank (Afreximbank) opened at 99.50 bid, par offered after recently pricing at par.

In other trading on Monday, names from Ukraine were surprisingly firm, a trader said. Another trader noted a lift in City of Kiev's bonds.

And Turkey's banks and corporates continued to put in a strong performance.

"But Turkey's 2030s are at 170 to 170.50, or 15 bps wider despite amazing gross domestic product data," a trader said.

Russia's corporates were also firm, with reasonable volumes going through, another trader said.

"Gazprom and KazMunaiGaz are all moving slightly wider," he said.

By late afternoon Gazprom's 2-37s were at 110 to 110.75, or 15 bps wider. Vimpelcom's 2022s were at 93 to 93.75, or 30 bps wider.

Korea National Oil eyed

In deal-related news, Korea National Oil Corp. mandated Barclays Capital, Bank of America Merrill Lynch, HSBC, the Korea Development Bank and RBS for a roadshow starting Sept. 15, a market source said.

A dollar-denominated bond offering may follow, subject to market conditions.

And the final book for lender Banco de Credito del Peru SA's issue of 6 7/8% notes due Sept. 16, 2026 was about $700 million, a market source said.

The $350 million notes priced at par on Sept. 8 via Bank of America Merrill Lynch and Morgan Stanley in a Rule 144A and Regulation S deal.

The notes are non-callable for 10 years.

Outflows could rise

Taking a closer look at fund flows, RBC Capital Markets is forecasting a rise in outflows during the coming days as a result of concerns about the United States and the euro zone.

But EM bonds are expected to show continue resilience as compared to equity markets, according to an RBC report.

"With developed market yields dropping to historic lows - 2% and below - amidst growing fiscal and debt concerns, EM local market government bonds' high yields and stable fiscal dynamics are proving to be irresistible," RBC said.

Barclays Capital Markets, in a separate report, named some bonds that are among the currently irresistible. On the list were Centrais Eletricas Brasileiras SA's 2015s, Gazprom's 2013s and 2014s, Bank of Moscow's 2013s and 2015s and Petroleos de Venezuela SA's 2013s, 2014s and 2015s.

"Many investors remain highly risk averse and wish to stay underweight versus their benchmarks," the report said. "For them, we recommend shortening duration to reduce risk, rather than moving into lower spread-beta products such as EM sovereigns."

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