Emerging market debt consolidates ahead of U.S. holidays; Mexico sells $65 million exchange warrants

By Reshmi Basu and Paul A. Harris

New York, Nov. 18 - Emerging market debt consolidated Friday, after rallying in previous sessions on the back of stronger U.S. Treasuries. Mexico also announced that it had sold $65 million of exchange warrants.

"Most of the credits are a little bit off today [Friday]," said a trader.

"We had a pretty good rally or so in the last week or so, so maybe it's just a pullback," he said.

Another market source added that the asset class was softer on a weaker Treasuries market. Treasuries fell in response to news comments made by European Central Bank president Jean-Claude Trichet. Trichet said that the ECB is ready to raise interest rates for the first time in five years.

At Friday's close, the yield on the 10-year note stood at 4.50% from Thursday's close of 4.45%.

Additionally, investors did not want to add risk ahead of an abbreviated work week, said a sellside source, who added that investors wanted to "leave things liquid enough."

During the session, the Brazil bond due 2040 lost half a point to 121.90 bid, 122.10 offered. The Ecuador bond due 2030 fell a quarter of a point to 91¼ bid, 92¼ offered. The Russia bond due 2030 shed 0.39 to 111½ bid, 112 offered.

Busy primary

Friday's session proved to be busy one for the primary market, as issuers tapped investors ahead of the Thanksgiving holiday in the United States.

United Mexican States sold $65 million of three series of debt exchange warrants which allow holders to exchange $2.5 billion of dollar denominated bonds for peso-denominated bonds.

Credit Suisse First Boston and JP Morgan ran the transaction.

The Republic of Panama announced Friday that it would purchase $815 million of bonds maturing in 2008, 2011, 2012 and 2020 in its cash tender offer, which was announced on Monday, Nov. 14.

The country also priced $980 million of bonds due Jan. 2026 (Ba1/BB/BB+) to finance the country's concurrent tender offer.

Citigroup managed both transactions.

Out of Russia, three corporate issuers priced deals.

Bank of Moscow, via Kuznetski Capital SA, sold a $200 million offering of 10-year lower tier II notes (Baa1//BBB-) at par to yield 7½%.

Barclays Capital and Merrill Lynch ran the Regulation S transaction.

Next, state-owned OJSC Russian Agricultural Bank (Rosselkhozbank) priced a $250 million offering of five-year notes (Baa1//BBB-) at par to yield 6 7/8%.

ABN Amro and Dresdner Kleinwort Wasserstein were the joint bookrunners for the Regulation S transaction.

Also, SalavatNefteOrgSintez, a refinery owned and operated by the Bashkortostan government and managed by Gazprom, priced a $100 million issue of 3.5-year credit-linked notes to yield 7.95%, according to information published Friday by underwriter MDM Bank.

And Bahrain-based Arab Banking Corp (Baa2/BBB) sold $400 million of five-year floating-rate notes at 99.821 to yield a spread of three-month Libor plus 49 basis points via Citigroup and HSBC.

Liquidity draws issuers

Nonetheless, Friday's busy session came as no surprise to the sellside source. And while trading volumes have thinned out in recent session, volumes are high enough that issuers can tap the market.

"It's not as liquid as when we have these huge rallies where everyone says: the market is going to crash, the market is going to crash" because spreads have gotten so tight they only have one way to go.

"It's liquid enough so that they [issuers] can perform," he observed.

For instance the recent spate of liability management transactions have given a push to the market, noted the sellside source.

"In terms of Mexico, it tells you that there's not going to be much paper, so that's been driving their yields and spreads down a lot lately."

Additionally, frequent issuers are gaining experience in dealing with the capital markets. And they are taking measures to re-profile their debt in order to lower their coupon.

Moreover, investors are faced with the dilemma of finding short-term paper, noted the sellside source. For instance, a lot of debt issued in the periods from 1997 to 1998 and from 2001 to 2002 is coming due.

"There is some short-term paper that is maturing this year," remarked the sellside source.

"They [investors] need to replace that and some of that usual paper is not being replaced. For example, Argentina is not issuing. Brazil is issuing less with longer tenors.

"So they have to find something else. And honestly, there is not that much else."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.