EM pipeline gets more clogged but investors lack conviction; Gerdau, Burgan Bank coming soon

By Christine Van Dusen

Atlanta, Sept. 22 - Emerging market issuers like Brazilian steel maker Gerdau Trade Inc. and Kuwait's Burgan Bank continued their march to market on Wednesday at a time when investors theoretically weren't risk averse but still lacked conviction.

"The tone is sort of cautious," a London-based investment analyst said. "People are more concerned about pricing and books aren't massively, hugely oversubscribed."

The sense among investors is that "things are too tight, but they have cash to put to work, so they have to do that," he said. "They still have to look at deals and consider them."

Overall, volumes were "light," he said. "There's very little action. If there was conviction there would be selling in the secondary. There would be more secondary trading to buy more deals. But right now they'd rather hold on to what they have. They have cash to put to work, so they don't have to sell in the secondary."

Contributing to investors' lack of conviction: Tuesday's comments from the Federal Open Market Committee, which indicated that rates would remain low, no bond-buying program would be instituted and measures would be taken to support the economy if necessary.

"I think that has something to do with it. It's kept the 10-year Treasury yield very low," the analyst said. "That keeps people from selling what they already own. But when a deal looks too tight, people are just reluctant to get involved in a big way."

Issuance remains attractive

Still, investors do continue to look fondly upon the asset class, a New York-based market source said.

"The technicals have been very, very positive and we continue to see quite a bit of inflows into the market, a lot of people chasing yield," he said. "It's very supportive of new issuance, which had been coming pretty rapidly."

Valuations, he said, "are starting to look a little rich. So we could see some spread compression."

But even if spreads are wider, issuance remains "attractive; that's the bottom line," the London source said. "It's just too cheap for them to resist."

The New York-based market source agreed. "It's still very attractive for companies to issue in this market. It's really a matter of who really needs to do it," he said. "Those who can and are able to do it are doing it. The issuance pipeline is not dead yet. It's more a question of companies needing it and being ready."

At this point, "we're not yet at the point where risk aversion is happening and the window is closing," he said. "It's wide open. It's just a matter of who's ready to jump through it."

Cheung Kong prices notes

The primary market was mostly quiet on Wednesday, following the late-Tuesday pricing of $1 billion of 6 5/8% perpetual notes from Hong Kong-based property developer Cheung Kong Infrastructure Holdings Ltd., which came to market at par to yield 6 5/8%, according to a market source.

JPMorgan was the bookrunner for the Regulation S notes, which are non-callable for five years.

Wednesday saw Philippines-based business conglomerate and developer SM Investments Corp. planning dollar-denominated fixed-rate bonds due 2017 as part of an exchange offer, according to a company announcement.

Combining the exchange response and additional bonds sold for cash, SM Investments will issue at least $300 million and not more than $500 million of the securities.

Citigroup, HSBC and BDO Capital & Investment are the dealer-managers for the transaction, which is expected to price in October.

Included in the exchange are $350 million 6¾% notes due 2013 and $500 million 6% notes due 2014. The purpose of the exchange offer is to extend the maturity of some of the company's existing debt.

Gerdau, Burgan set guidance

In other news, Brazil's Gerdau Trade set price guidance for its planned benchmark-sized dollar-denominated notes due 2020 at the 6% area, a market source said.

HSBC, Santander and JPMorgan are the bookrunners for the Rule 144A and Regulation S deal, which closed its books on Wednesday and is expected to price soon.

Proceeds will be used to repay indebtedness and for general corporate purposes.

The guidance makes sense, given that the Brazilian steel industry in general is dealing with a complex operating environment and Gerdau in particular has a weak earnings outlook, the New York source said.

The current guidance is "pretty tight," he said. "That's to be expected with Brazilian steel these days. I get the sense that if it comes in under 6% then investors will be more skittish, but at 6% it will probably do OK."

Gerdau Trade is a subsidiary of Porto Alegre, Brazil-based Gerdau SA.

Also setting price guidance on Wednesday was Kuwait's Burgan Bank. The subsidiary of Kuwait Projects Co. Holding KSC (Kipco) talked its planned issue of 10-year bonds at 8¼%, a market source said.

JPMorgan, Morgan Stanley and Standard Chartered are the bookrunners for the Regulation S-only deal, which was previously whispered at the low 8% area.

The issue is expected to total at least $300 million and price this week.

Several deals on tap

Market-watchers were also whispering about a possible deal from Chinese property developer Yanlord Land Group Ltd., which is meeting with investors this week.

"They're in town," the London-based source said. "I'm not sure what they want to do."

Also coming through town before the end of the week, he said, is Brazil-based petrochemical company Braskem SA with Deutsche Bank, HSBC and Itau.

"That's still a non-deal roadshow at this point," he said. "I have no idea what they want to do."

Investors now await Argentina-based wind and hydropower equipment company Industrias Metalurgicas Pescarmona SAIC (IMPSA)'s issue of up to $300 million notes via UBS and Bank of America Merrill Lynch, which was talked at a yield of 10½%.

"The books have closed," the London market source said.

Also up ahead: Beijing-based medical device and diagnostics company Chinese Medical Technologies' $200 million senior notes due 2015 via Deutsche Bank and Standard Chartered Bank, as well as a dollar-denominated benchmark issue of notes from railway company Kazakhstan Temir Zholy (KTZ) with Barclays, HSBC and RBC.

Next week could also bring a sukuk offering of up to $750 million from Qatar Islamic Bank via HSBC and Credit Suisse.

And some sources say they're keeping an eye on Brazilian energy company Petroleos de Brazil SA.

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