Germany's comments push down euro, widen spreads for EM assets; Al Baraka offering eyed

By Christine Van Dusen

Atlanta, Dec. 13 - Emerging markets assets were fairly stable on Tuesday morning before spreads widened again on the news that Germany has rejected raising the €500 billion lending limit for the European Stability Mechanism. But investors continued to buy some blue-chip names.

"Over the last 24 hours the euro has taken a post-summit dive and taken credit spreads with it," a trader said. "As such, emerging Europe, Middle East and Asia now trades like it wishes the year was over now. With so much obvious pain still left in the European banking system, it's hard to get excited about credit product in general."

Most cash bonds opened Tuesday unchanged.

"Early flows suggest people still love Middle Eastern and North African five-year benchmarks while still reducing exposure to Gazprom and Turkey," he said.

By the afternoon in Europe, risk assets were taking a bit of a hit.

"After a relatively positive day in emerging markets, with the Markit iTraxx SovX index spread grinding in to 345, [Germany's] comments, rejecting an increase in the upper limit of funding for Europe's permanent bailout mechanism, sent the euro to $1.31 and put risk assets back on the defensive," a trader said. "You have to admire the resilience of retail investor demand, as they continue to buy five-year risk in names like Sberbank, Abu Dhabi National Energy Co. (TAQA) and Qatar. But elsewhere it's tough going."

Liquidity thins

Overall, trading action was limited and thin on Tuesday, a trader said.

"Afternoon liquidity was very light," he said. "Spreads are actually closing a little better but don't really feel that way late in the day."

Investors showed some interest in Abu Dhabi Islamic Bank's bonds following the news that the lender's fixed-rate 2011 notes matured on Monday.

"Retail and local investors are still piling into the recent Qatar 2017s and 2022s and the new TAQA notes," he said.

TAQA recently priced a $1.5 billion two-tranche issue of notes due 2017 and 2021 via bookrunners Bank of America Merrill Lynch, Mitsubishi UFJ Securities, RBS and Standard Chartered in a Rule 144A and Regulation S transaction.

The deal included $750 million 4 1/8% notes due 2017 that priced at 99.502 to yield 4.233% and $750 million 5 7/8% notes due 2021 that priced at 99.515 to yield 5.94%.

"The 10-year TAQA traded as high as 101.375 before closing offered there," he said. "It's still a very solid effort since launching."

The notes ended the day at 101.10 bid, 101.35 offered. The 2017s closed at par bid, 100.15 offered.

Africa, Middle East in focus

One trader was watching bonds from Egypt on Tuesday.

"It's worth keeping an eye on the Egyptian market," he said. "Their bonds today are closing very heavy. The 2020s that were at 102 in mid-September are closing at 88 bid, 89 offered at the year lows."

Said another trader, "Egypt's 2020s are making new lows as the situation there worsens."

Meanwhile, Bahrain's 2020 bonds continued to get squeezed. The notes were seen trading on Tuesday at 103.5 bid, 104 offered.

Ukraine struggles

Looking to the Ukraine, most bonds continued to suffer.

"Ukraine is 15 bps wider as the Naftogaz and Gazprom talks stall," a London-based trader said.

From Kazakhstan, lender BTA Bank hit new lows, with its 2018s at 25.

"The continued outperformers are Turkish banks, which remain rock-solid thanks to retail investor demand," a trader said.

Looking to Russia, weakness in the ruble remained and the tumultuous political climate was putting a squeeze on liquidity, he said.

Al Baraka hopes to do deal

In deal-related news, Turkey's Al Baraka Turk Participation Bank - a subsidiary of Bahrain-based Islamic lender Al Baraka Banking Group BSC - is looking to price its planned $200 million issue of five-year sukuk notes by the end of the week, according to a company announcement.

Deutsche Bank, Emirates National Bank, Noor Islamic Bank and QInvest are the bookrunners for the possible deal, which was first announced in November.

The notes are being whispered in the 6% area.

This followed the news that Colombia-based lender Banco de Bogota SA on Monday priced a $600 million issue of 5% notes due Jan. 15, 2017 at 98.894 to yield 5¼%, a market source said.

Citigroup, HSBC and JPMorgan were the bookrunners for the Rule 144A and Regulation S deal.

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