Emerging market debt widens on U.S. core market softness; Pakistan, Gazprom sells new paper

By Reshmi Basu

New York, May 24 - Emerging market debt reversed fortunes Thursday as spreads widened amid light trading volumes. Investors squared away positions ahead of the holiday weekend.

In the primary market, Pakistan and gas giant OAO Gazprom issued new debt.

On Thursday, investors took the opportunity to cash out on the market's recent run-up, which witnessed spreads grind to record lows. During the session, the JP Morgan EMBI+ Index widened 3 basis points to 152 basis points versus U.S. Treasuries, after piercing a low of 149 basis points the previous day.

Meanwhile high beta credits Argentina and Venezuela led the decline. During the session, the Argentine discount bond due 2033 eased 1.35 to 105 bid, 105.25 offered. The Venezuelan bond due 2027 shed 1.35 to 116.75 bid, 117.15 offered,

Among other benchmark names, the bellwether Brazilian bond due 2040 gave up 0.55 to 134.15 bid, 134.25 offered. The Turkish bond due 2030 lost 0.68 to 155 bid, 155.50 offered.

EM lower on core market weakness

In trading Thursday, emerging markets debt tracked a declining U.S. stock market, which saw the Dow Jones Industrial Average index extend its losing streak to four sessions.

Investors took the opportunity to duck out of U.S stocks, prompted by releases of strong data on home sales and durable orders, which further reinforced sentiment that the Federal Reserve may lift interest rates.

The Commerce Department reported that new-home sales surged 16% in April, a figure unexpected in the market. And in a separate report, new orders for U.S.-made durable goods jumped 0.6% in April.

The data also pressured U.S. government bonds, which saw the yield on the 10-year note close at 4.857%, after touching as high as 4.90% earlier in the day.

But while the Treasury weakness dulled investors' appetite for riskier assets, U.S. equities remained the primary driving force.

Furthermore, Thursday's weaker performance was to be expected, given the market's recent run up, according to market sources. But spreads should remain steady.

"We think the trend is definitely to stay stable to tightening," remarked the buyside source.

"It's probably going to take a breather from here

"But the way external market technicals are shaping up with the reduced supply and at least stable if not increasing demand, that's going to be very supportive for spreads going forward," noted the source.

Entire Ecuador shock video to be aired

Turning to Ecuador, the attorney general Jorge German said he will look into allegations of market manipulation, triggered by a "shock video" which shows finance minister Ricardo Patino in a meeting with alleged debt holders. The recording included an audio of a plan to "shock" the market with hardline comments, which would push bond prices lower.

In February, Patino said the Andean country would miss the deadline for a $135 million coupon payment on its global bonds 2030. But shortly afterwards, the government said it would make the deadline, which some have suggested may be "market manipulation."

Calls for Patino's resignation have mounted. But in response, he has asked for the entire video to be aired, claiming the three-minute clip aired on the news was taken out of context.

Whether or not Patino or president Rafael Correa will escape unscathed will depend on the rest of the video, which is scheduled to be aired Thursday evening, according to an emerging market analyst.

Furthermore, the fallout from the scandal will also hinge on how the local media responds once the entire recording has been viewed.

"Patino does seem pretty clueless in the section of the video that's been shown, so he may be able to plead ignorance. Correa will definitely be tarnished by this one way or the other, but I think at this point it's unlikely to hurt Ecuador's external debt a lot more than it already has," noted the analyst.

"If anything, this scandal raised the possibility that the threats to default were all just a ruse," he added.

In trading, Ecuador continued to see softness. Its bond due 2015 gave up 1.25 to 94 bid, 95 offered.

Pakistan, Gazprom sell new paper

Meanwhile in the primary market, a sovereign and a corporate tapped the market.

The Islamic Republic of Pakistan sold a $750 million offering of 10-year global bonds (B1/B+) at par to yield 6 7/8%.

The deal came tighter than price guidance for a yield of 7% area.

Citigroup, Deutsche Bank and HSBC were lead managers for the Rule 144A and Regulation S transaction.

""It doesn't seem to be going very well," noted the buyside source, who added, "You just have the full market weakness."

In the secondary market, the deal was spotted down at 99 1/8.

From Russia, state-controlled gas monopoly Gazprom sold a two-part offering of sterling- and euro-denominated notes (A3/BBB/BBB-).

The issuer priced £550 million of six-year notes at par to yield a spread of Gilts plus 115 basis points, which came in line inside of guidance of 120 basis points area.

Gazprom also sold €700 million of seven-year notes at par to yield a spread of mid-swaps plus 79 basis points, which also priced inside of talk of 80 to 85 basis points.

ABN Amro and Morgan Stanley were joint bookrunners for the sterling-denominated tranche, while ABN Amro and Societe Generale were joint bookrunners for the euro-denominated tranche.

Both tranches were structured as Regulation S deals.

On March 1, Gazprom priced a dual-tranche offering of €500 million in 10-year global notes and $1.3 billion in 15-year global notes (A3/BBB/BBB-).

Astana hits the road

Adding to the pipeline, JSC Astana Finance plans to start a roadshow for a euro-denominated offering of three-year senior eurobonds (Ba1//BB+) next week.

The roadshow will start in Amsterdam on May 29, continue in London on May 30, and wrap up in Frankfurt and Munich on May 31.

Citigroup and Deutsche Bank are lead managers for the Regulation S deal, which will sold via the issuer's euro medium-term note program. This is the first series to be sold under the program.

The issuer is a non-bank financial institution with headquarters in Astana, Kazakhstan. The City of Astana, which owns 25.5% of the institution, will provide a comfort letter for the program.

© 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.