New EM deals falter in trading; spreads widen; marketing trip ahead for Chile's Colbun

By Christine Van Dusen

Atlanta, Aug. 2 - Recent new deals from emerging markets issuers sputtered in the secondary market on Friday, surprising investors who had hoped the asset class' previous outperformance would carry over into this week, market sources said.

Bermuda's new issue of 4.854% notes due in 2024 provided a case in point, with the notes talked at 265 basis points over Treasuries but pricing at a spread of 225 bps.

"It was like a bait and switch, with the initial guidance and where it priced, and as a result it hasn't traded above fixed reoffer yet," a Connecticut-based trader said. "Bermuda is usually snapped up pretty quickly because of the AA rating and the fact that there is not much Caribbean paper out there."

The recent issue of 6¾% notes due 2022 from Brazil's Odebrecht Offshore Drilling Finance Ltd. also struggled in trading at the end of the week, he said.

"It initially traded very well and looked cheap. It traded up a point and a quarter in the gray," he said. "But as soon as the deal was issued, they did a poor job of allocating and there were nothing but sellers the rest of this week. That deal has fallen below fixed reoffer."

This came against the backdrop of a smaller-than-expected monthly increase in new jobs in the United States and wider bond spreads. The Markit iTraxx SovX CEEME ex-EU index spread on Friday opened at 232 bps over Treasuries, wider from Thursday by 2 bps. The Markit iTraxx Crossover index spread - seen Thursday at 395 bps - moved out to 398 bps on Friday.

"Turkey is generally trading wider on the back of the U.S. Treasury move yesterday," a London-based analyst said.

Outflows continue

In other news, emerging markets bond fund once again saw weekly outflows, this time totaling as much as $714 million for the week ended July 31. That's down from the previous week's $1.1 billion, according to data-tracker EPFR Global.

"The outflows were split between local currency and hard currency while blended currency saw small inflows," a London-based trader said.

Typically, at the end of a month there's cash waiting to be put to work, the Connecticut-based trader said.

"But we haven't seen buyers of essentially anything all week," he said. "Guys are not getting in."

Mersin in focus

The new deal from Turkey's Mersin Uluslararasi Liman Isletmeciligi AS (Mersin International Port) - $450 million 5 7/8% notes due 2020 that priced at 99.576 - got some attention on Friday.

The notes were priced to yield 5.95% via Citigroup, DBS Bank and Unicredit Bank in a Rule 144A and Regulation S deal.

"The new Mersin deal has seen some early buying, trading at 99½ to par," the analyst said. "But we do not expect this small deal to be actively traded."

Rating outlook plagues Croatia

Bonds from Croatia traded down between a ¼ point and a ½ point after the sovereign's rating outlook was lowered from stable to negative by Standard & Poor's, a trader said.

Russia-based potash producer Uralkali's notes traded 2 bps to 3 bps wider after the company was placed on review for a downgrade by Moody's Investors Service.

Market sources were also whispering about a possible issue of notes from Mexico in the coming months.

Colbun sets roadshow

Chile-based utility company Colbun SA has mandated Citigroup, HSBC and Scotiabank as bookrunners for a dollar-denominated issue of notes that will be marketed during a roadshow, a syndicate source said.

The Rule 144A and Regulation S marketing trip will begin on Aug. 6 in New York, London and Los Angeles and will conclude on Aug. 7 in New York and Boston.

Sovereigns rule

Investors should consider moving out of corporate credits into sovereigns and quasi-sovereigns from emerging markets, according to a report from Barclays.

"Central bank actions are likely to remain a driving force for EM as investor concerns about the effects of tighter global funding conditions on EM countries remain elevated," the report said. "In EM credit markets, however, we believe that recent performance patterns do not fully reflect fundamental divergences and vulnerabilities yet, as technical factors seem to have dominated in many cases."

Names like Mexico offer particular value, the report said.

"Corporates should be cheapening versus sovereigns, not richening," Barclays said. "The credit cycle has peaked and defaults are gradually rising, and this trend should accelerate as EM growth slows, capital flows weaken and foreign exchange volatility rises."

The bank recommends that investors switch out of Qtel International bonds into those from Qatar.

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