Battered EM debt market limps into weekend amid constrained liquidity; lira drops again

By Rebecca Melvin

New York, Aug. 17 – Emerging markets debt “limped into the weekend” on Friday, with bonds under pressure after a bounce in the previous 24 hours to 36 hours and as the Turkish lira resumed a downward trajectory, a London-based trader said.

The lira turned lower again after recovering for three sessions following a record low notched on Monday.

Meanwhile, late Friday S&P’s and Moody’s Investors Service downgraded the sovereign. S&P’s said it lowered its long-term currency sovereign credit rating to B+ from BB- and its long-term local currency sovereign credit rating to BB- from BB.

The downgrade, S&P said, reflects the rating agency’s expectation that the extreme volatility of the Turkish lira and a projected sharp balance of payments adjustment will undermine Turkey’s economy.

Moody’s downgraded Turkey’s long-term issuer ratings to Ba3 from Ba2 and changed its outlook to negative. Moody’s said its downgrade was driven by continuing weakening of Turkey’s public institutions and reduced predictability in Turkish policy making.

Turkey’s bonds and emerging markets debt in general were under pressure ahead of the rating agency news.

“Spreads are struggling, commodities are still for sale, rates are better bid, and Turkey is 20 to 25 wider,” a trader said, referring to a 20 basis points to 25 bps wider move for the week for Turkey’s sovereign debt.

Turkey’s five-year credit default swaps, or the price paid to insure its debt against default, had moved tighter early Friday to about 500 bps, which was in from about 600 bps at the wides this past week.

“We tried a little bit of a bounce,” a trader said regarding Thursday’s and early Friday’s market, “with guys nibbling on some of the stuff that really got beaten up.” Demand had been better for some corporate names including Turkcell Iletisim Hizmetleri AS, Koc Holding AS and Turk Telekomunikasyon AS, among others, he said. These were the higher credit names.

Even Turkey’s bank debt was a little better but still wide on the day, with spreads between 100 bps to 300 bps wider for the week, depending on the bank issue, the trader said.

Banks remain a main point of stress, while corporates are in better health in comparison, the trader said. “But we are pretty much limping into the weekend.”

Liquidity was described as “dire,” with market uncertainty combining with the typically slow mid-August market for constrained trade. Many people are away on vacation and trading desks are lightly staffed, so matching orders was “very, very difficult,” the trader said.

In response to a question about recovery, the trader, “I don’t think it will ever recover completely. It will be a struggle for Turkey five-year to get back to 200 in the next year or so.”

Turkcell’s 5.8% notes due 2028, of which $500 million priced in April, were last at 80, having started the session better at 83. The notes saw their biggest slide on Monday. They dropped to 76.50 on Tuesday before recouping some ground Wednesday and Thursday. On July 29, the bond was 89.40.

Turkcell’s 5ľ% notes due 2015 remained higher on the day, at 87.40 bid, 88.05 offered, which was up 1.3 points. This bond had sunk to 81.80 this week from 90.75 on Monday.

S&P’s downgraded Turkcell in May but left its ratings two notches above the sovereign rating, noting that Turkcell keeps almost 80% of its cash in hard currencies and tries to keep enough cash reserves to serve its next 12 months of debt obligations. Its rating is BB+, which was lowered from BBB-.

S&P’s noted in its Turkcell ratings action that “in the hypothetical case of a depreciation of the lira, we think that the appreciation of the cash balance would offset the increase in unhedged short-term debt maturities and capital expenditures.”

The market turmoil sparked by Turkey’s currency crisis spread to most global financial markets this past week including U.S. stocks. But the Dow Jones industrial average and S&P 500 stock index ended the week slightly higher, while the Nasdaq stock market was slightly lower.

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