Banco Safra eyes five-year dollar benchmark of notes; inflows show record start to 2018

By Rebecca Melvin

New York, Jan. 26 – Emerging markets wrapped up a strong week of new issuance and secondary market performance on Friday, and market players began to turn their attention to next week. The primary forward calendar was beginning to grow with Brazil’s Banco Safra SA embarking on fixed-income investor meetings on Friday for a dollar-denominated benchmark of five-year notes, a market source said.

There was also chatter about Mexico’s Credito Real SAB de CV Sofom ER pricing a Swiss franc-denominated deal and of bookrunner Itau BBA managing an issue of perpetual notes, but those reports were unconfirmed.

The Federal Open Market Committee is set to meet next week, but markets were not seen turning skittish before the central bank’s next update on Wednesday. One market source said that new issuance should not be hindered ahead of the meeting.

In the meantime, emerging markets continued to see strong inflows. The emerging markets debt-dedicated funds’ inflows total $8.8 billion year to date, the strongest start on record, according to Morgan Stanley research published on Thursday.

The inflows have been evenly split between hard and local currency funds. And 34% of the inflows in the last three weeks were directed to ETFs, which is a pattern similar to 2017, when inflows were strong in the early part of the year but then slowed, according to the Morgan Stanley update on emerging markets strategy.

In hard currency, new issuance continues to be well absorbed with strong order books despite an uptick in supply. The corporate issuer’s debuting in the cross-border debt market saw especially strong demand. And most sovereign issues came in at decent new issue concession, Morgan Stanley strategists Simon Waever, Min Dai, Gilberto A Hernandez-Gomez, Andres Jaime, Jaiparan S. Khurana, Jesper Rooth and Chun Him Cheung, wrote in the report.

“Cash balances have come down further,” to 4.9% as of Jan. 1, “but are still healthy. Our measures of risk allocation suggest EM-dedicated investors have been adding risk by favoring single B and BB credits over BBB credits. Investors have reduced Mexico exposure but added Brazil and Argentina. They have also cut Nigeria but added Ecuador.”

In addition to large issues by Chile and Petrobras priced this past week, Brazil’s Natura Cosmeticos SA priced its debut cross-border bond issue with $750 million of five-year notes, Argentina’s MSU SA priced $600 million of seven-year non-call four bonds, and Agua y Saneamiento Argentinos (AySA) priced $500 million of five-year non-call three notes.

Earlier in the week, Mexico’s Unifin Financiera, SAB de CV Sofom ENR priced $250 million of 8 7/8% subordinated perpetual notes at par, and Genneia SA priced a $150 million reopening of its 8¾% notes due 2022 for a new total deal size of $500 million.

The International Monetary Fund has maintained its forecast for growth in emerging markets and developing countries for 2018 and 2019. In Latin America, a pickup in economic activity in Brazil and Mexico was expected to be tempered by Venezuela’s potential default of some $70 billion in cross-border debt.

Meanwhile, the latest GDP figure for the U.S. fourth quarter came in on Friday at 2.6%.

Throughout the week an intensifying military offensive by Turkey against U.S.-allied Kurdish militia in northern Syria was making headlines. But market players did not react noticeably to the developments.

“I don’t think the military offensive has too much of an impact on Turkish credit right now although there’s always a risk that it could if the risk of the clash between Turkey and U.S. forces rise or with Russian/Syrian forces. So it is a focus and might explain some risk aversion, but not a driver at this moment yet,” MUFG Securities analyst Trieu Pham told Prospect News on Thursday.

Dollar moves watched

MUFG’s Pham said that moves in the U.S. dollar were a much bigger influence driving the emerging markets credit space at this point. The dollar regained strength on Thursday after a drop on Wednesday that bolstered emerging markets.

The dollar was pushed higher initially – to the highest level since March 15, 2017 – after U.S. Treasury Secretary Steven Mnuchin said that a “weaker dollar is good for trade.”

Fed meeting eyed

Looking ahead, the emerging primary market is expected to remain strong even as eyes begin to turn to next week’s FOMC meeting.

The Fed will meet on Tuesday for a two-day meeting. There will be no press conference or updated economic forecast, but the Fed’s statement will be scrutinized for clues about its outlook on rates.

Some suspect that the Fed will make changes in the statement to prepare the soil for a possible rate hike in March.

It will be watched for clues regarding whether officials are still on track for three 0.25% rate increases this year. The Fed last raised its benchmark federal-funds rates in December by 0.25% to a range of between 1.25% to 1.5%.

© 2015 Prospect News.
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