Emerging debt sees light flows as FOMC meeting starts; Cell C sells €400 million seven-year bonds

By Reshmi Basu and Paul A. Harris

New York, June 29 - Emerging market debt saw light flows Wednesday as some investors have already checked out ahead of the long weekend in the United States.

In the primary market, South African cellular company Cell C (Pty) Ltd. priced €400 million of seven-year notes (BB-/B2) at par to yield 8 5/8% via Citigroup.

"It finally came back from the dead," said a market source.

"The deal was downsized and they dropped the senior subordinated tranche. But they came out with talk of 8½% to 8¾%, and got it done right in the middle of that."

The company withdrew a previously planned €625 million deal in May. That had been structured as seven-year first-priority secured notes and 10-year senior subordinated notes.

Meanwhile Air Jamaica's new deal is performing well in the secondary.

On Tuesday, the airline sold an upsized offering of $200 million in 10-year notes (expected B1/B) at par to yield 9 3/8%.

At mid-morning trade, the new 2015 bond was spotted at 101¼ bid.

Bear Stearns was the bookrunner for the Rule 144A/Regulation S transaction for the Kingston-based airline.

The summer season break has kept the debt market in idle, said sources, with the last several sessions being characterized as very quiet.

Nonetheless, the month of July is expected to be a good month from a technical standpoint as amortizations and coupon payments come due, said sources, meaning that all of that cash has to be put to work.

"There is nothing out there for it to be a bad month," said a syndicate source, adding that the economic news in the United States has not been a deterrent as the market has taken it in stride.

And Thursday's foregone conclusion of a Fed rate hike has already been discounted, he noted. The Federal Open Market Committee is expected to raise rates by 25 basis points to 3¼%, its ninth consecutive increase in a year.

A change in the Fed's language would disrupt the market, said the sellside source, but noting that such an event seems highly unlikely.

But inflationary pressures could derail the market's positive tone.

"It [oil prices] may not be over $60 anymore, but it's still high. If it remains this high, sooner or later it's going to give problems," he noted.

Overall, the market remains on very firm footing, said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal, as investor sentiment is helped by low interest rates in the United States and, in the short-term, the coming down of crude oil prices from $60 per barrel.

"Those two factors and that you don't have additional risk aversion coming from the U.S. equity market sums up to a positive picture for emerging markets," he said.

Argentina's upgrade

A ratings upgrade for Argentina had minimal impact on its sovereign paper, said sources, saying such a move was anticipated after the country completed its debt restructuring.

On Wednesday, Moody's Investors Service raised Argentina's sovereign rating ceiling to B3 from Caa1.

The International Monetary Fund now expects to start negotiations with Argentina on a new loan program in July, according to IMF managing director Rodrigo Rato.

"I think it's quite clear that the situation going forward is quite complicated for Argentina," said Alvarez.

"The challenges ahead still prove very lofty," he remarked.

"The effect of the upgrade was quite subdued," said Alvarez, given that overall trading in the market has been subdued.

"There's not a lot of overall participation in the market so in general there have not been real significant changes [for Argentina] in the market," he said.

Overall, emerging market debt saw light action. During trading, the Brazil C bond was down 0.01 to 102.18 bid while the bond due 2040 gained 0.10 to 119.70 bid.

Also on the ratings front, Standard & Poor's upgrade of the Dominican Republic to B from SD came as no surprise, sources said, but did help its paper. Its bond due 2011 gained one point to 107¼ bid.

Meanwhile more unrest continued to put pressure on the Philippines. It was announced that Gloria Arroyo's husband was leaving the country indefinitely as she comes under attack for allegedly rigging last year's election.

The nation's bond due 2030 lost one point to 102.68 bid.

Samurai bonds seen

Of late, the market has been seeing more and more issuances of samurai bonds.

The Republic of Hungary Tuesday priced ¥75 billion in a two-tranche deal (//A-) of five- and seven-year samurai bonds. The deal, increased from ¥50 billion, was comprised of ¥30 billion in five-year bonds and ¥45 billion of seven-year bonds.

On June 8, Poland priced ¥75 billion of seven-year bonds at 16 basis points more than Yen-Libor. On June 16, Korea Development Bank priced ¥30 billion of five-year bonds.

"I think one of the biggest draws is the sense that you don't really mess with market technicals when you tap the Samurai market," said an emerging market analyst.

"If you tap the dollar or euro market, you run the risk of stuffing too much new supply into the market and forcing a sell-off.

"When you tap the Samurai market, it usually has no effect on the supply/demand balance in the dollar and euro markets.

"Not everyone can do it, of course, because Japanese investors are generally unwilling to dabble in overly exotic names, but it makes perfect sense for well-known, high-grade East Asian and Central European names," he said.

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