EM debt spreads wider, hold within recent range; Ukraine edges up; LatAm sovereigns slip

By Rebecca Melvin

New York, Oct. 26 – Spreads on emerging markets debt widened on Friday but remained within their recent trading range despite this past week’s tumult in equity markets.

The spread on the J.P. Morgan U.S. dollar emerging markets sovereign bond index was wider by 9 basis points at 394 bps on Friday, compared to 379 bps at the beginning of the week. That’s still below the most recent peak of 407 bps touched on Sept. 4, Michael Roche of Seaport Global told Prospect News.

Ukraine’s newly priced five-year and 10-year senior notes edged up in trade after the sovereign priced $750 million of the 9% 2024 notes and $1.25 billion of the 9¾% 2028 notes on Thursday.

The new Ukraine bonds were quoted at 100.3 in the early going after pricing with a new issue premium of 15 bps to 20 bps, according to a London-based market source.

“It was a decent sized book so not so surprising,” the source said.

As a whole, Ukraine’s sovereign spread was about 7 bps wider on the day.

Selling in U.S. technology and internet stocks accelerated in a whipsaw session on Friday, with the tech heavy Nasdaq stock index falling another 2.1% and dropping further into correction territory. The S&P 500 stock index fell 1.7% – and stands on the cusp of correction territory – and the Dow Jones industrial average lost 1.2%, with both indexes again turning negative for the year. The week was marked with sharp drops and rebounds in equities as investors weighed earnings reports and worried about what economic slowdowns in China and Europe might do to corporate earnings.

The Dow had soared 401 points on Thursday, after plunging more than 600 points the day before.

“Conditions are clearly on the defensive. The spread is wider today by nine points, and there are a number of credits widening,” Roche said of emerging markets debt.

Among Latin America credits, Costa Rica was wider by 12 bps, Mexico was wider by 11 bps, Argentina was wider by 12 bps, and Ecuador was also wider.

The moves wider in Central and Eastern Europe Middle East and Africa were “a little less dramatic,” Roche said. But Ukraine and Turkey were both wider by 7 bps.

Despite the volatility this past week, the emerging markets debt primary remained active. In addition to Ukraine, Oman priced a large $1.5 billion seven-year sukuk with a distribution rate of 5.932%; United Arab Emirates’ utility National Central Cooling Co. PJSC, or Tabreed, priced $500 million of seven-year sukuk certificates with a distribution rate of 5½%; Korea Housing Finance Corp. priced €500 million of 0.75% five-year covered bonds; and Tunisia priced €500 million of 6¾% five-year notes at 98.975 to yield 7%.

Joining the forward calendar on Friday was Kazakhstan, which plans to issue euro-denominated senior unsecured notes (expected rating: Baa3//) under its $10 billion medium-term note program. Citigroup and Societe Generale are bookrunners for the deal.

But Peru has still not been forthcoming with a planned dual-tranche offerings of notes that has been on the calendar since the beginning of October. The proposed notes include a benchmark-sized offering of sol-denominated euroclearable bonds under Rule 144A and Regulation S and a dollar-denominated note registered with the Securities and Exchange Commission.

The market is definitely open to Peru, Roche said, citing its still very strong credit metrics even though growth has slowed somewhat.

The valuation of dollar sovereign names in the J.P. Morgan global index has been ranging between about 360 bps to 410 bps, Roche said. So this week, “it has been holding in reasonably well” and new issues have done well.

“Ukraine’s new issue did well; Oman, an oil exporter, did well; Tunisia, a high yield purchased by many Middle Eastern accounts, did well,” Roche said. “All had generous pricing to comparables.”

“The only one that did poorly was Al Candelaria, the Colombian energy pipeline company, which was sabotaged by investor fears after competitor Gran Tierra’s oil pipeline was damaged in a bomb attack triggered by an unidentified group after the Al Candelaria deal priced, Roche said.

Al Candelaria priced $650 million 7½% 10-year notes at par last week.

As for market action since Monday, “It was an interesting week to be sure. But the move in dollar-denominated EM credit was relatively tame compared to EM equities and currencies and came through the week reasonably well.”

“The bias is upwards on the spread, but there has not yet been a catalyst to cause a panic among investors that would see valuation charge upward.”

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