Emerging market paper creeps higher; investors eye Russia's bank run

By Reshmi Basu

New York, July 9 - Emerging market debt edged higher Friday in thin trading as investors watched the unfolding of the Russian bank run saga.

Overall, demand for Brazilian and Russian debt firmed up. The Brazilian C bond was up 1.125 to 93 bid while its bond due 2040 was up 0.625 at 95.2 bid during Friday's session.

The Russian bond due 2030 was rose 0.625 at 91.125 bid.

That reversed the situation Thursday when the liquidity problem at Russian banks and concerns about the fate of oil company Yukos had placed downward pressure on the market.

But Friday's, debt traded higher, helped by a regional holiday in Brazil's São Paulo state.

"You have slightly better prices than yesterday [Thursday]," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"With most of the Brazilian market out, the lack of overall liquidity has helped people push the prices higher.

"There is little new news out there that is influencing the market," Alvarez added.

"I think there is a little relief that there is not more noise from Russia.

"The Russian government has been making suggestions about the mergers that need to take place to cool the insolvencies that have been occurring."

The flow of negative news from Thursday softened a bit Friday as the government said the liquidity crisis was not widespread. The Russian central bank stepped in to stabilize the crisis early this week by cutting reserve requirements, according to Standard and Poor's.

In addition, state-owned Vneshtorgbank agreed to buy 86% of Moscow-based Guta Bank, which suspended its operations this week.

The country's biggest privately owned lender Alfa Bank said its owners provided $800 million as a backstop to discourage a run on the bank.

Supply in check, strategist says

Some investors have said that the recent giant Aries Vermogensverwaltungs GmbH deal repackaging Russian Paris Club debt and Brazil's two taps in the capital markets in less than three weeks have dumped too much paper into what they consider a fragile asset class.

But a debt strategist said that this is clearly not the case.

In particular, he pointed to the debt tender by Venezuela state oil and gas monopoly Petroleos de Venezuela SA (PDVSA).

PDVSA launched an offer on June 28 to buy back $2.5 billion and €88.4 million of its debt.

"Supply effects are exaggerated relative to demand in the asset class," said the debt strategist.

He also downplayed market complaints about Brazil's sale of $750 million of 10-year bonds late Wednesday. Some in the market said it was not well placed with investors and weighed on overall levels.

The criticism is unwarranted, the strategist said, given that Brazil did what was best for it.

"I'm not shocked by issuance. And I'm certainly not shocked by issuance when there's a 30 basis points rally in Treasuries," said the strategist.

"The timing was a direct consequence of their [Brazil's] views of the U.S. Treasury market.

"I think the rally gave them an opportunity to complete this year's business.

"The deal was good for Brazil because they picked what may have been a locally rich day to do it and a locally rich part of the market to do it and they got it done.

"Isn't that their job?

"They are paid by the Brazilian taxpayer and they saved Brazilian taxpayer a couple of million dollars through an adroit tactical timing in the marketplace.

"Why would this be a source of investor complaint?

"Investors have the option to not buy it," he adds.

Russia more of a concern than Brazil

The strategist went on to say he does not believe the Brazil issue has put pressure on the market.

The stress has come from the "nervousness of levered investors vis-à-vis the Russian banking situation," he said.

As evidence, he said Russian bonds traded down while Brazil's C bonds - which have an intermediate 2014 maturity - also traded down.

"You didn't see the long end of emerging markets do a thing," he said.

The source of concern is not that there are major structural issues threatening the banking sector but that the banks' problems could spill over into assets such as government and corporate bonds.

"You could be looking at secondary or involuntary supply. I think that's really the supply story in the marketplace that took down things like the Russian 30s and Brazil's C down a couple of points.

"I think it was more Russian jitters."

The sell-off is in anticipation of possible forced selling of corporate and government paper by Russian banks needing to raise funds to pay anxious depositors, the strategist argued.

"Russian banks cannot sell loans. Every bank in its way is a kind of a hedge fund because they are short funded with the depositor money and then they have longer assets," noted the strategist.

"Every bank by definition has a structural duration mismatch.

"What they do have is liquid and illiquid assets. The liquid assets are usually called bonds. Those they can sell."

Primary action in Korea

Meanwhile in primary action Friday, South Korea's LG Telecom priced $200 million of five-year notes (Ba2/BB+) at 98.01 to yield 8.75% via Credit Suisse First Boston.

Korea Southern Power (KOSPO) set guidance for its $150 million 10-year notes (A3/A-) at Treasuries plus 138 to 143 basis points. Pricing is expected on Monday.

From Malaysia, NCL Corp. Ltd. (B2/B+) priced an upsized $250 million offering of 10-year senior notes at par to yield 10 5/8%. The deal had originally been envisioned as a $200 million placement.

JP Morgan Securities was bookrunner for the Rule 144A/Regulation S transaction.

Barclays Capital and ABN Amro Holding NV are running the Regulation S deal.

And Chaoda Modern Agriculture (Holdings) Ltd. has shelved its planned $150 million five-year bonds (Ba3/BB).

Credit Suisse First Boston and Merrill Lynch were the lead managers for the Regulation S deal.

Chaoda Modern is a Fuzhou, China and Wanchai, Hong Kong-based organic farming company.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.