EM liquidity fairly healthy, spreads slightly tighter even as economic worries increase

By Christine Van Dusen

Atlanta, Sept. 13 - Emerging markets assets managed to remain fairly resilient on Tuesday, even in the face of continued economic concern, this time spawned by the poor showing at a debt auction in Italy.

But even EM assets were beginning to fray around the edges, market sources said, and investors remained cautious while issuers moved only slowly toward bringing new deals to the market.

On Wednesday, a smattering of issuers planned deals, including Peru's BBVA Banco Continental, Brazil's Minerva SA, Gail India Ltd., Vietnam Bank for Industry and Trade (VietinBank) and Poland's Polskie Gornictwo Naftowe i Gazownictwo SA.

"We started with the crazy notion that China might buy Italian bond futures," a London-based trader said. "This did initially give a bid to the market, with the [Markit iTraxx SovX spread] as low as 282 basis points. But then rumors - also untrue - about BNP's funding, followed by a poor Italian auction, dented sentiment and has sent us to new wides of 292 bps."

Still, spreads managed to tighten a touch by day's end, with the JPMorgan Emerging Markets Bond Index Plus spread narrowing by 2 bps to Treasuries plus 354 bps, with Venezuela tighter by 14 bps.

"Lacking new U.S. or euro zone negative developments left market participants in a mildly more upbeat mood Tuesday, though sentiment is still very fragile," according to a report from RBC Capital Markets.

Liquidity still remained relatively healthy, a New York-based market source said.

"Things are a little shaky, but it seems like there's still a reasonable amount on the client front to buy paper when they have to," he said. "Guys are mildly liquid and there aren't a lot of outflows in the asset class. But having said that, it looks like they've raised a little money, anticipating a few outflows."

Emerging markets simply can't shrug off the negative global news forever, he said.

"Everything going on in Europe is pointing to a pretty major slowdown," he said. "The odds of a recession are getting greater than they were three months ago. So we're in this state of uncertainty."

In trading, Lebanon and Russia's banks stood out as outperformers.

LatAm issuers market deals

Peru-based lender Banco Continental embarked Tuesday on a roadshow with Goldman Sachs and JPMorgan, a market source said.

The marketing trip began in New York and London and will travel to Chicago and Switzerland before concluding on Sept. 15 in Boston and Los Angeles.

And Brazil-based food processing company Minerva has mandated Goldman Sachs, BTG Pactual, Morgan Stanley and BB Securities for a roadshow beginning Sept. 14, a market source said.

The marketing trip will be held in Latin America, Europe and the United States.

The Minerva news came against the backdrop of weakening economic conditions for Brazil, the New York-based market source said.

"Their gross domestic product wasn't great, at 3% after 7% last year," he said. "Things are a little shaky."

Gail India, VietinBank ahead

In other deal-related news, New Delhi-based natural gas processing and distribution company Gail India is planning a $300 million issue of notes, a market source said.

Issuance is expected to take place in November.

No other details were immediately available on Tuesday.

And VietinBank has mandated Barclays Capital and HSBC for a planned issue of $500 million notes, a market source said.

This follows the March announcement that the bank had mandated Barclays Capital, Credit Suisse, Goldman Sachs and JPMorgan for a similar deal.

PGNiG on deck

Also on Tuesday, Poland's PGNiG planned for a European roadshow starting Sept. 19 for a euro-denominated issue of notes, a market source said.

The company previously announced plans to sell up to €1.2 billion of fixed-rate or floating-rate notes with maturities of up to 10 years.

BNP Paribas, Societe Generale and Unicredit are the bookrunners for the deal.

The Warsaw-based oil and gas company plans to use the proceeds for general liquidity purposes.

This news followed the late Monday pricing of Taiwan-based Advanced Semiconductor Engineering's two-tranche issue of RMB 650 million notes due 2014 and 2016, a market source said.

The deal included RMB 150 million 3 1/8% notes due Sept. 22, 2014, which priced at par, and RMB 500 million 4¼% notes due Sept. 20, 2016 that also priced at par.

Citigroup was the bookrunner for the Regulation S-only notes, which include a change-of-control put at 101%.

Lebanon 'a rock'

In trading, Lebanon was "a rock," a trader said. The sovereign's 2016 notes, which priced at 99.98 in July, were trading on Tuesday at 100.17 bid, 100.67 offered. The 2022 notes - which priced at 99.195 - were seen at par bid, 100.50 offered.

"The best idea I've heard today is perhaps we should spread everything off Lebanon, which is unchanged for the week," another trader said.

The Ukraine sovereign continued to outperform the corporates, but overall names from that country lagged.

"Ukraine is an underperformer as Standard & Poor's downgrades their local currency rating," a trader said. "It's just to reflect their new methodology, but the market sold off nonetheless."

Russia banks outperform

Russia's banks looked "resilient," a trader said.

"The Sberbank curve looks very steep to me, versus other bank curves," he said. "The whole sector is remarkably resilient when you see the chaos in the broader banking system."

Standouts included Sberbank's 2021s, Vimpelcom's 2021s and KazMunaiGaz's 2021s, another trader said.

"But otherwise the wide bid-ask makes it tough," he said.

Said a New York-based trader: "Obviously we're trading more on the global backdrop now as things deteriorate. That's just the state we're in."

Valuations stretched

Overall, emerging markets assets continue to hold up relatively well under stress. But valuations appear a bit stretched, according to Luz Padilla, portfolio manager for the DoubleLine Emerging Markets Fixed Income Fund.

"When you compare the five-year credit default swaps of some emerging markets we find that there are 11 countries representing nearly 50% of the JPMorgan index with CDS levels lower than triple-A France," she said in a Tuesday conference call. "While France is under pressure, it seems incongruent that a double-B sovereign could trade at levels narrower than France."

While double-B sovereigns are expected to continue their upward migration in terms of ratings, those potentially positive events are already priced into trading levels, she said.

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