EM credit remains weak as Fed unveils ‘new normal’; Vivo cancels due to ‘adverse’ market

By Rebecca Melvin

New York, June 13 – Emerging markets credit remained weak on Wednesday after the U.S. Federal Reserve raised its short-term interest rate another 25 basis points and signaled that four rate hikes are in the cards for this year, not two or three as some emerging market players had hoped.

The June rate hike – this year’s second increase – was all but priced in. But there had been some speculation regarding whether the Fed would suggest the possibility of slower tightening. The opposite was true, however.

The Federal Reserve raised its fed funds target rate to a range of between 1.75% to 2%. It last raised the rate in March to between 1.5% to 1.75%.

Given the strength of the U.S. economy, the Fed is only doing its job of trying to maintain full employment and keep inflation at 2%, a New York-based Latin America syndicate source said.

With the stage set for faster rate hikes, “it’s not a great day in the market, but in some ways this was pretty much expected. If rates go up it will put pressure on local currencies and their bonds; this is the thing that everyone had been dreading,” the source said.

“Hopefully the market will digest this and be okay with the new normal. And hopefully we get a couple of days of stability to price the deals in the pipeline. If we don’t, it’s going to complicate things,” the source said.

One deal on the calendar is that of Frontera Energy Corp. There was no word yet whether the offering of $500 million of five-year notes was pricing. But the Colombia-focused energy company had been scheduled to wrap up roadshow meetings on Wednesday. The market will watch with interest to see whether the deal gets done on Thursday.

This week the emerging markets secondary has been particularly heavy and the primary largely sidelined amid concerns about the Federal Open Market Committee.

Vivo Energy plc did not wait for the conclusion of the meeting and instead announced early on Wednesday that it has decided not to proceed with a planned issue of notes at this time due to adverse market conditions.

Africa-focused Vivo, a Shell licensee, operating 1,800 service stations in 15 countries, said the deal was cancelled despite “strong interest” in the proposed $400 million of senior notes due 2023 or 2025, to be issued by subsidiary Vivo Energy Investments BV.

The company planned to use proceeds to repay debt and finance the cash portion of its proposed acquisition of Engen International Holdings (Mauritius) Ltd.

The Vivo cancellation did not really matter to the emerging markets debt market, a London-based trader said, characterizing the Wednesday session as “illiquid, painful and heavy.”

In the secondary space, Egypt was particularly weak, with spread widening across its sovereign curve. Other credits were mixed. Oman-based BankMuscat’s shorter-dated notes, including the 3¾% notes due 2021 and the 4 7/8% notes due 2023, were tighter on spread, while its ultra-long-dated notes were significantly wider.

Meanwhile Fitch Ratings said it revised the outlooks of all nine rated Qatari banks to stable from negative.

The banks include Commercial Bank of Qatar, Doha Bank, Qatar Islamic Bank SAQ, Al Khalij Commercial Bank QSC, Qatar International Islamic Bank, Ahli Bank QSC, International Bank of Qatar (QSC) and Barwa Bank QSC.

Fitch said the action follows a June 5 revision of the Qatari sovereign’s outlook to stable from negative and affirmation of the country’s long-term issuer default rating at AA- and reflects the agency’s view that Qatar has successfully managed the fallout from last year’s rupture of trade, financial and diplomatic relations with the Quartet consisting of the UAE, Saudi Arabia, Bahrain and Egypt.

In Latin America, Ecuador’s 7 7/8% notes due 2028 were down about 2/3 point on the day to 86.26. That represents a 14-point slide since the notes were priced initially in January.

More Fed updates

In a press conference following the Fed’s release of new economic projections for rates, unemployment, inflation and economic growth going forward, Fed Chairman Jerome Powell said the U.S. economy is “in great shape.”

Growth in household spending “has picked up,” while business fixed investment has continued to grow strongly. Its predications for GDP are for a rate of growth of 2.8% this year, which is up 0.1% from March, and 2.4% in 2019 and 2% in 2020, which were unchanged. An average per month of 180,000 jobs are being added to payrolls, and unemployment at 3.8% is the lowest level in nearly two decades. Meanwhile, the labor participation rate is unchanged since 2013 and that is good news considering the aging U.S. population, Powell pointed out. The Fed forecasts 3.6% unemployment in the fourth quarter and 3.5% in the next two years.

The Fed also made an adjustment to the IOER, or the rate which the Fed pays on excess reserves deposited by private banks. This rate was lifted by only 20 bps, not 25 bps, with the aim being to keep the fed funds target rate in the middle of the IOER rate rather than at the upper level.

He also said that he is willing to allow inflation to rise about its 2% target but would take action if it is persistently above 2%. “Things buffet, inflation moves back and forth. We expect it will be either above or below and hope that that will be symmetric,” Powell said.

Another change made by the Powell Federal Reserve is that it will be increasing the number of press conferences held per year to eight from four currently, starting in January.

© 2015 Prospect News.
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