Risk sentiment improves, could be temporary on Europe concerns; Latin American supply eyed

By Christine Van Dusen

Atlanta, June 24 - The tone in the emerging markets was weaker but the flow of new bond deals continued on Thursday, albeit at a drip, as Latin American issuers took advantage of a somewhat more hospitable climate - one that might not stick around long, given that the European debt crisis continues to fester behind the scenes.

"We're seeing more of the ebb and flow - we're up, then we're down, and a lot of that has to do with the risk-on, risk-off trade that I think is exemplified by the equity markets," said Luz Padilla, portfolio manager for the DoubleLine emerging markets fixed income fund.

"Today we're weaker, which isn't all that surprising, given what's happening in the equity markets and also given what's happening with the whole European situation."

Debt crisis continues

While the European debt crisis doesn't seem to loom quite so large in the minds of emerging market investors these days, the drama remains.

Greece's bonds were under pressure Thursday as the sovereign continued coping with its junk status and as Greek regulators extended the ban on short-selling of shares.

And Hungary, which recently roiled markets by comparing its financial situation to that of Greece, received weak demand in a recent auction of 12-month Treasury bills and saw its credit default swaps rise.

"We're not talking about it as much, but Greece's yields are continuing to go up and are now almost within shouting distance of the all-time high," Padilla said.

And the European Central Bank is one of the only buyers for Greek debt. "Nobody else is buying the bonds," she said. "There's isn't a natural buyer base for them except the ECB, and at some point they have to see that break for other people to get interested."

So, overall, "there's still a lot of concern about what the ultimate endgame is going to be" for Greece and the European debt crisis. Given that it's far from resolved, "I'm not sure, as an investor, this is the best time for me to be maximizing my risk basket," she said.

Pipeline narrowly open

The story is different for emerging market issuers, though. Bringing deals to market right now is "exactly the right thing to do for an issuer who is trying to get it done," she said. "If I'm an issuer, this is an opportunity to get some of my financial needs taken care of and out of the way, so I should just do it because I'm not sure how long that window will remain open."

So it made sense that Mexico City-based baked goods and snack company Grupo Bimbo SAB de CV on Wednesday sold $800 million 4 7/8% notes due 2020 at 99.726 to yield 4.91%, or Treasuries plus 180 basis points.

That pricing was "definitely good news" for market sentiment, a New York-based market source said. "It was largely oversubscribed."

The deal had "the lowest coupon out of Mexico this year," he said. "It's a super-attractive yield."

But by Thursday afternoon, "it was one of the securities that widened out," Padilla said. "If you step back and take a look at what's happening in the rest of the world, you may say that for a 10-year bond the high 170s and low 180s are not the best compensation for that type of risk. We just saw that widen out."

LatAm perks up

Other Latin American issuers on Thursday took steps toward bringing new deals to market.

Mexico City-based homebuilder Corporacion GEO SAB de CV is marketing a proposed $200 million issue of 10-year notes, which are non-callable for five years, for the purposes of refinancing current debt.

Sao Paulo-based Banco Votorantim SA is meeting with investors in the United States and Europe this week with Bank of America Merrill Lynch.

And Caracas, Venezuela-based Banco Mercantil will set out on a roadshow during the June 28 week with bookrunner Bank of America Merrill Lynch for a proposed issue of notes, a market source said.

Also from Latin America, Brazil's Banco Cruzeiro do Sul SA could be bringing its planned five-year notes - via Bank of America Merrill Lynch, BCP Securities and UBS - to market in the next few weeks. The deal, which was whispered at 9% to 9½%, had been delayed.

With this activity, it appears that deal flow may begin to pick up soon - assuming serious volatility remains at bay.

"People are getting ready to go to market," the New York-based market source said. "We definitely will see more activity if the market holds up well."

Another Latin American issuer was struggling, though. Argentina, which this week closed its $18.3 billion debt restructuring, wasn't attracting investors. The sovereign recently set its expectation at 60% participation and got 66%, which on its face looked good, but that expectation had been "whittled down" from an initial goal of 75%, Padilla said.

"What they got was OK, but it was a revised downward expectation," she said. "Maybe some people are just stepping away and saying there could be a better entry point."

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