Emerging market debt takes a break from recent rally; Morocco issues new debt

By Reshmi Basu and Paul Deckelman

New York, June 20 - Emerging market debt halted a five-session winning streak as a sell-off in U.S. Treasuries, a soft performance by the U.S. stock market, and declining oil prices stymied investors' appetite for risk.

Hawkish statements from the European central banks triggered a sell-off in European government bonds, which in turn dampened the U.S. Treasury market as the yield on the 10-year note scooted up to 5 1/8% from Tuesday's close of 5.086%.

Among the session's losers were high beta credits such as Argentine, Ecuador and Venezuela.

Morocco issues new debt

Meanwhile in the primary market, the Kingdom of Morocco was the third sovereign to tap capital markets this week, following in the footsteps of Ukraine and Brazil.

Morocco (Ba1/BBB-/BBB-) sold a €500 million offering of 10-year sovereign bonds at 99.328 to yield mid-swaps plus 55 basis points.

The issues came at the tight end of guidance, which was set at 55 basis points to 60 basis points more than mid-swaps.

Citigroup and JP Morgan were joint bookrunners for the Regulation S deal.

On Tuesday Brazil reopened its global bond due 2028 to add R$750 million and on Monday the Ukraine sold $500 million in global bonds due 2012.

In other primary news, Hynix Semiconductor priced a $500 million issue of 10-year senior unsecured notes (Ba3/BB-/BB) at par to yield 7 7/8%.

The yield came at the tight end of 7 7/8% to 8% price talk, which had been lowered from earlier talk of the 8 1/8% area.

Citigroup, Credit Suisse, Goldman Sachs & Co., Korea Development Bank and Merrill Lynch & Co. were joint bookrunners for the Rule 144A/Regulation S notes.

Proceeds will be used to redeem $500 million of the company's 9 7/8% senior notes due 2012.

Two Russian corporates price deals

Out of Russia, AK Bars Luxembourg SA sold a $250 million offering of three-year loan participation notes (Ba2//BB-) at par to yield 8¼%.

The issue priced at the tight end of guidance, which was set at 8¼% to 8½%.

AK Bars Bank, a commercial bank, will borrow the funds. The bank was established by the government of the Republic of Tatarstan.

Deutsche Bank and Citigroup were lead managers for the Regulation S deal.

Elsewhere, OJSC AK Transneft sold a two-part offering of loan participation notes (A2/BBB+), which included €700 million in five-year notes and $500 million in five-year notes.

Both tranches priced at par to yield a spread of mid-swaps plus 60 basis points, which came on top of price talk.

Citigroup, Goldman Sachs and UBS Investment Bank were lead managers for the Rule 144A and Regulation S deal.

The Moscow-based pipeline operator transports approximately 93% of the oil produced in Russia.

On Feb. 23, the issuer sold a $1.3 billion offering of seven-year loan participation notes at par to yield mid-swaps plus 55 basis points.

DP World ups bond offering

In other news, DP World Ltd. (A1/A+) increased the size of its two-part senior unsecured bond offering to $3 billion from $2 billion.

The deal includes a tranche of dollar-denominated 10-year sukuk bonds and a tranche of 30-year conventional notes.

Guidance for the 10-year sukuk bonds has been set at the Treasuries plus 115 basis area while the 30-year notes have been talked at the Treasuries plus 160 basis points area.

Bookrunners for the 10-year sukuk bonds are Barclays, Citigroup, Deutsche Bank and Dubai Islamic Bank.

Bookrunners for the 30-year notes are Barclays, Citigroup, Deutsche Bank and Lehman Brothers.

The Dubai, United Arab Emirates-based port operator is entirely but indirectly owned by the government.

Coming from the subcontinent, the State Bank of India set price talk for a maximum $225 million offering of perpetual hybrid tier 1 bonds (Baa2/BBB-) at mid-swaps plus 135 to 140 basis points.

The issue will be non-callable for 10 years. If the bonds are not called, the coupon steps up by 100 basis points.

Citigroup and JP Morgan were the lead managers for the Regulation S deal.

EM rally ends

Back to trading, the secondary market rally of the past several sessions came to an abrupt end on Wednesday as U.S. Treasury issues fell and their yields rose, which in turn dragged emerging debt issues mostly lower.

However, even though some individual names widened out substantially overall risk spreads between Treasuries and EM bonds were not much changed and remained near recent all-time tight levels.

Those tight spreads have encouraged sovereign and corporate issuance in the EM sphere. A major development in Wednesday's market was the Hynix Semiconductor deal, which was solidly oversubscribed before it priced - although the new bonds moved down from their issue price when they began trading in the aftermarket.

The fall in Treasuries brought the yield on the benchmark 10-year 4½% notes up to 5.14%, a gain of 6 basis points on the session. Among the factors being blamed for the reversal are technical considerations, along with hedging activity going on in related fixed-income markets, with some companies planning to issue debt seen as possible sellers of the government paper to hedge against the chance of higher borrowing costs.

With emerging markets yields also going up as prices went down, the closely-followed EMBI+ index maintained by JP Morgan & Co. showed an average spread between emerging markets issues and Treasuries of about 151 bps, close to where they already were, and not too far above their all-time tight levels about 149 bps.

New Hynix deal garners attention

Much market attention was paid to the $500 million Hynix Semiconductor deal, with a trader seeing those bonds as having been "massively" oversubscribed - he estimated the order book "more than 10 times oversubscribed" at some $6 billion.

However, despite that robust demand for those 7 5/8% bonds due 2017, aftermarket appetite left something to be desired, the trader noted that the new issue "closed a little weaker, against a backdrop of weaker Treasuries."

After the bonds priced at par and actually moved up to 100.5 bid in initial secondary trading, they dropped back from those peaks, he said, to finish at 99.625 bid, 99.75 offered.

A second trader saw those bonds - which traded off both emerging market desks and conventional high yield shops - as having moved up to offered levels around 100.75 "right out of the box". But while they "tried to come higher, it didn't work out," and the bonds began to fall back - first to bid levels at 100.25, and then, to around 99.25 bid, par offered. The trader saw the bonds trade into a 99.5 bid and said they were left at 99.25 bid, 99.625 offered.

The first trader said that "a combination of factors" undermined the bonds once they began trading around, particularly the "weak tone" in Treasuries. "We did see some selling pressure on the backdrop of Treasuries and [lower] equities."

The trader - who normally watches Asian debt - cited "a pretty weak day in EM as a whole, with spreads widening across the board.

"Everything kind of had a weak tone to it - if you look at the [Standard & Poor 500 index's] intraday chart, and the selling in U.S. equities tended to just accelerate over the course of the afternoon, and that's how we closed out.

Asian, LatAm debt softer

In Asian sovereign debt, he saw Philippines government paper down about ½ point - the benchmark 2031 bonds currently trade around 131.625 and the 2032 paper around the 97.5 level - and saw the widely traded five-year credit default swaps contracts linked to those sovereigns as having widened out by about 4 bps on the day to spreads at 96-99 bps - still just a couple of bps from their all-time tights at 92 bps, and well under the swollen levels around 110 bps hit at the depth of the recent sell-off in Treasuries and EM debt.

Among Latin American issues, Brazil's benchmark global 11% bonds due 2040 were being quoted down slightly more than ½ point at 131.625. Another source called the bonds down around 2/3 point, at just above 131.5, with the bonds' yield having widened 9 bps to around the 6.05% mark. The small early-session losses accelerated as the day wore on.

Brazil's real-denominated local-currency bonds were also easier on the day, in line with a fall by the real, with the Treasury sell-off sparking fears that non-U.S. currencies as well as bonds and equities will be less attractive to investors, in relative terms, as yields on U.S. government bonds rise.

The Brazilian currency unit suffered its biggest drop in four months, falling 1.3% on the day to a level of 1.9287 reals to the dollar.

That in turn pushed the real-denominated bonds lower, with the yield on the zero-coupon bonds due 2028 about 2 bps wider, at just under 11.25%.

Argentina turns cold

Another loser - which had been a winner over the previous few sessions - was Argentina, whose volatile debt is still the biggest decliner so far this year among widely traded EM sovereign issues, pulled lower by investor angst over the reliability of the official economic data coming out of Buenos Aires.

The country's benchmark 8.28% global issue due 2033 - which has jumped a point or better in each of the last four sessions - was seen down 2¼ points Wednesday to just above par, while its yield ballooned out by 20 bps.

Mexican bonds slid after President Felipe Calderon unveiled his proposed tax plan, which political analysts believe may run into more opposition in that country's legislature than originally thought. Previous optimism that the tax plan would pass easily and quickly had buoyed the bonds over the previous several sessions.

The 10% peso-denominated bonds due 2024 were seen down more than a point on the day to just under the 122.5 level, while the benchmark bonds' yield widened out by 10 bps to 7.66%. That yield had come in by more than 20 bps over the previous several sessions on investor hopes for the Calderon plan.

© 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.