EM stays resilient despite Spain's troubles; Brazil's Embraer, Banco do Brasil sell bonds

By Christine Van Dusen and Aleesia Forni

Atlanta, June 12 - Even as Fitch Ratings' downgrade of Spain's banks sent the sovereign's bond yields skyrocketing, emerging markets assets remained fairly stable on Tuesday, with tighter spreads and moderately active flows.

The primary market slowly came out of hibernation, with new deals from Brazil-based issuers Banco do Brasil SA and Embraer SA.

The Markit iTraxx SovX index spread started the day unchanged at Treasuries plus 325 basis points.

"We are seeing a relatively constructive start of the day," a London-based analyst said. "Activity remains focused on the liquid benchmark names and the general theme is of continued outperformance of EM credit versus other markets."

By the European close, the SovX spread was at 323 bps over Treasuries.

"That's the tights of the day, and the overall mood is buoyant," a London-based trader said.

Flows, meanwhile, were mixed, he said.

"The only real theme has been better selling of bank names while real money investors put money to work in benchmark investment-grade paper," he said.

Said another trader, "Another fairly solid day, although there were pockets of selling and some credits were marked lower throughout the day. Net-net, though, spreads are doing fine."

Even though Russia was closed for a holiday, the country's bonds continued to outperform their peers.

"You have to admire the outperformance of Russian debt, even as oil enjoys $5 intraday moves," the London trader said. "Demand for top-tier Russian quasi-sovereigns, as well as the Turkey sovereign, continues."

Brazilian issuers price deals

Lender Banco do Brasil priced an upsized $750 million issue of 5 7/8% subordinated notes due 2023 at 99.023 to yield 6%, according to a syndicate source.

The deal was originally $500 million and priced on top of yield guidance.

HSBC, Standard Chartered and Banco do Brasil were the bookrunners.

Aircraft producer Embraer priced a $500 million issue of 5.15% notes due June 15, 2022 at par to yield 5.15%, or Treasuries plus 248.6 bps via Citigroup, Itau Unibanco and Morgan Stanley in a Securities and Exchange Commission-registered deal.

Proceeds will be used for general corporate purposes, including working capital needs.

"I think that the issuance will continue, provided that the Greek elections don't result in a huge upset for the market," a New York-based market source said. "So we're really going to have to wait and see. It's very touch and go with what's going on in Europe. Political risk seems to be the main driver in the United States as well as Europe, so it's very hard to invest with all those uncertainties clouding the horizon."

Jafza launches notes

In other deal-related news, Dubai's Jebel Ali Free Zone (Jafza) - which operates an industrial free trade zone - launched a $650 million issue of notes due 2019 to yield 7%, a market source said.

The notes were initially whispered at the low 7% area, then talked at 7% to 7¼%.

Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Citigroup, Dubai Islamic Bank, Emirates NBD, National Bank of Abu Dhabi and Standard Chartered are the bookrunners for the Regulation S deal.

Proceeds will be used to refinance existing debt.

"If B-rated Jafza can borrow seven-year money at 7% in the midst of all this [market uncertainty], then something is working properly," the London trader said. "It just shows you how well the Middle East has performed this year."

Cash positions grow

So far for the month of June, emerging markets issuers have brought about $4.79 billion in deals to the market, a New York-based emerging markets strategist said.

That is a big drop from May, when $16 billion of issuance was reported. In April, the total was about $30 billion.

"That's a clear indication that investor sentiment has been severely pressured by the goings-on in Europe," he said. "The positive thing is, if you examine what the impact on cash positions has been, it means that the lack of issuance has helped cash positions grow over the past two months."

In May, just from maturing bonds and interest payments, cash positions were up $2.4 billion. So far in June, they are up $11.6 billion.

"That's created a very positive dynamic in the market that's going to support new issuance as it comes out," he said. "Many portfolios have restrictions on how much cash they can actually hold on to and have to put to work. Hence the support you'll be seeing for new issuance, despite the ongoing uncertainties. There's very little going on inside of EM that provides any reason to be cautious on EM, other than the China slowdown."

Kazakhstan continues roadshow

Astana-based Development Bank of Kazakhstan continued its roadshow in Kazakhstan and Malaysia for an offer of up to $500 million in Islamic bonds.

"A local rating agency, specializing in sukuks, rated them at AA2, stating that the bank exhibits very weak asset quality, but it draws comfort from the implied support from the government," the analyst said.

The bank's existing 2015 bonds are "crazy rich," the London trader said. "They're at 10 bps through KazMunaiGas."

Market-watchers were also keeping an eye on Ukraine, which paid $38 million in interest on its 10-year 7.65% eurobonds.

"Every interest payment and repayment will be closely watched by investors as Ukraine looks to issue eurobonds this summer," the analyst said.

JPMorgan, Morgan Stanley and VTB are the bookrunners for the new deal.

Poland sees demand

The recent €1.5 billion issue of 3¾% notes due Jan. 19, 2023 from the Republic of Poland attracted €4 billion in orders, according to an announcement from the Ministry of Finance.

The notes came to the market at 99.810 to yield mid-swaps plus 195 bps via Barclays Capital, Citigroup, Erste Group and ING in a Regulation S deal.

About 25% of the bonds were placed with investors from Germany, 16% from France, 14% from Poland, 11% from Austria and 7% from Asia.

Asset managers accounted for 43%, pension funds and insurance companies 32%, banks 18% and central banks 7%.

Middle East gets support

In trading, Abu Dhabi-based International Petroleum Investment Co. saw its 2015 notes - which traded Monday at 103 bid, 103.75 offered - unchanged on Tuesday. The company's 2016 notes were seen Tuesday at 109 bid, 109.50 offered after trading Monday at 109 bid, 109.75 offered.

Saudi Electricity Co.'s 2022 notes were quoted Tuesday at 102.70 bid, 103 offered. On Monday, the notes traded at 102.60 bid, 102.95 offered.

"The technical bid to this part of the world remains, and for choice there are better buyers today," a trader said. "Qatar names got very good support, with Qatar National Bank, Qtel International and the sovereign moving tighter as the day went on."

Mubadala was also popular, he said. Several other Middle Eastern issuers - including Dubai's DIFC Investments, Emirates and Dolphin Energy - received attention because they were paying coupons or their bonds were set to mature.

"It's all supportive," he said.

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