EM secondary softer; South Africa prices $2 billion notes; sovereign curve widens slightly

By Rebecca Melvin

New York, May 15 – Emerging markets debt remained under pressure on Tuesday as the U.S. dollar and Treasury yields spiked, and uneven selling pressure created some pockets of stability or positive sentiment as market players worked around the margins amid persisting volatility, sources said.

“It’s not falling out of bed,” a New York-based sellside source said of emerging markets.

Despite a jump in the U.S. dollar, which has been a central component of current woes, the Republic of South Africa announced and priced $2 billion of bonds, including $1.4 billion of 12-year notes and $600 million of 30-year notes.

The $1.4 billion of new South Africa 5 7/8%, 2030 notes priced at 99.992 to yield 5 7/8%, or a spread of 280.5 basis points over U.S. Treasuries. The yield was tight compared to initial price talk for a 6% area yield.

The $600 million of new 6.3% 2048 notes priced at 99.991 to yield 6.3%, or a spread over Treasuries of plus 310.1 bps. That was slightly tight compared to initial talk for a yield at 6 3/8%.

The size of the order book was about $4.3 billion.

The existing South Africa sovereign curve widened by only about 3 to 5 basis points. The move wider was deemed “not too bad,” considering weakness in some other credits, a London-based market source noted. There seems to be a lot of shorts in the Street that has sparked sometimes exaggerated or unexpected price moves, the source said.

Deutsche Bank/Nedbank, J.P. Morgan, Rand Merchant Bank and Standard Bank are joint bookrunners of South Africa’s Securities and Exchange Commission-registered offering.

Meanwhile, market players were watching positive aspects of the U.S. high-grade and European debt markets, where deals are printing with bigger than normal, but still manageable, concessions.

“Deals are breaking tighter, and the primary feels pretty good. There has been a backup in rates and emerging markets are seeing a softer secondary, but some low-beta names are outperforming high beta,” the New York-based source said.

In Latin America, Chile, Peru and Colombia were outperforming Brazil and Argentina, which has been cordoned off essentially due to financial turmoil that sent the Argentine peso down again on Monday to a low of 25 pesos to the dollar.

Mexico was lagging the overall scheme, which was attributed to the fact that upcoming elections in Mexico are taking a toll already on investors loathe to take on more uncertainty.

“The market is in a rut and trading sideways, but there are some preferred names out there,” the New York-based source said.

In the primary market, Brazil’s Unigel Luxembourg SA was pushing ahead with a revision of a deal that it scuttled in March. Unigel was talking a $200 million offering of notes due 2024 (expected ratings: //B+) to yield in the area of 10% on Tuesday.

The new deal represents a revision of a proposed $400 million of seven-year notes, which were non-callable for three years. That note offering was cancelled after initial price talk was announced in the 8% area.

Morgan Stanley, UBS Investment Bank and Bradesco are joint bookrunners for the new version of the Rule 144A and Regulation S notes.

“CMPC is on the calendar and Unigel came back, but there are no other announcements,” the source said.

The source was referring to Empresas CMPC SA, which announced a dollar-denominated offering of intermediate notes on Monday.

In the broader markets, the dollar hit highs for the year and the yield on the benchmark U.S. Treasury 10-year bond reached 3.09%, which was up from a 2.99% close on Monday. The moves were attributed to data on U.S. retail sales, which was firmer than expected.

The U.S. Commerce Department said retail sales rose a seasonally adjusted 0.3% in April from the prior month.

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