Emerging market debt lifeless in light trading; Korea Highway sets guidance

By Reshmi Basu and Paul A. Harris

New York, May 16 - Emerging market debt traded flat Monday during an illiquid session, unable to make headway with a dearth of new headline stories.

Meanwhile in the primary market, state-run Korea Highway Corp. set talk for a $500 million offering of 10-year senior fixed-rate bonds (A3/A-/A) at mid-swaps plus 70 basis points.

Market sources say that there is over $1 billion in the order book for the Korea Highway deal. Pricing is set for Tuesday pending market conditions.

Citigroup, JP Morgan and UBS Investment Bank have the books for the Rule 144A/Regulation S offering.

Next, the Bank of Moscow deal is expected to price Tuesday. Although no official size has been heard, one source said that orders, early Monday, had topped $300 million. Another source said the book was over $350 million.

Price talk remained at the 7 3/8% area, with the deal expected to come on the wide end of that range (7¼% to 7½%) or possibly wider.

Also, Ukraine's Ukrsotsbank set initial price guidance for an offering of $100 million to $150 million three-year bonds (Ba3/B-) in the area of 9%, according to a market source.

ABN Amro is running the Regulation S eurobond deal.

And pro forma guidance emerged on China Overseas Land & Investments' offering of $300 million of 10-year bonds at Treasuries plus 150 basis points.

HSBC and JP Morgan are running the Regulation S deal.

EM trading flat

With no price drivers, emerging market debt saw little movement Monday, said sources.

"I don't think the market has been driven at all today [Monday]. It's pretty much dead," said a buyside source.

"[U.S] Treasuries are flat. Equities seem bid, but EM seems slightly down. It seems pretty dead out there," he said.

Meanwhile, in the wake of the positive outcome of the Paris Club negotiations, Russian sovereign debt was trading steady going into the Monday session, according to a market source. Lower rated emerging markets credits were seen wider by six to 10 basis points on the longer end, said the source.

During the session, the Brazil C bond edged up 0.058 to 100.87 bid. The Mexico bond due 2009 rose 0.10 to 118.40 bid. The Russia bond due 2030 was bid at 107.43, down 0.07. The Venezuela bond due 2027 slid 0.93 to 97.70 bid.

No driver from junk

But perhaps what was most surprising to the buyside source was just how dead the high-yield market was Monday.

"There's no news in EM, so without any volatility from other markets, you wouldn't expect it to do anything," he remarked.

"I'm amazed that there doesn't seem to be that much going on in high-yield, in other words, there doesn't seem to be that much selling."

Furthermore, he stated that investors in emerging markets were cautious.

"But people are still bringing deals and it still seems to be going okay. It's quiet. It's not exciting. It's just plugging away."

"But at the same time, people are still defending it as a decent value. I don't buy it," he remarked.

The buyside source noted that compared to the U.S. high-yield market, emerging market debt looks very expensive.

"I think you got to get relative value. But spreads are too tight, so it's tough to get some traction here as far as high total return," he commented.

The market would need to see some sort of sell-off, he said.

He also said that "Eastern Europe has held in well and performed well, but that makes spreads, just like the rest of EM, not that attractive relative to high-yield."

The source added that the one part in emerging markets that looked attractive was the high-yield Asian sector such as India and China.

"That offers good value, but at the same time, there's more obvious value in the U.S. high-yield market than emerging markets."

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