South Africa, Shimao price; risk appetite gets boost, then recedes on Middle East concerns

By Christine Van Dusen

Atlanta, March 1 - South Africa and Shimao Property Holdings Ltd. priced notes on a Tuesday that saw risk sentiment begin to inch into positive territory before disappearing by mid-afternoon on continued concerns about the Middle East and North Africa.

"Lingering instability in Libya and concerns that protests could potentially spread and destabilize other more important regional oil producers - i.e. Saudi Arabia, Iran - left risk assets in retreat on Tuesday," according to a report from RBC Capital Markets.

So while the JPMorgan Emerging Markets Bond Index Plus spread tightened about 4 basis points early in the day after better economic data from the United States and Europe, caution crept back in after reports of Saudi Arabian tanks in Bahrain and the index finished down 2 bps.

Oil prices briefly exceeded $99 a barrel before trading at about $98.94, a market source said.

"This was no doubt a major driver of the renewed risk aversion," said Gavan Nolan, an analyst with Markit, in a report.

Bahrain ticks up

In trading, Bahrain's 2020 notes were seen at 92.25 bid, 93.25 offered after trading Monday at 92 bid, 93 offered, a London-based trader said.

And Dubai "has a small bid so far," he said.

The Abu Dhabi sovereign, as well as its corporate issuers, had a firm start on Tuesday. "They're all 10 to 20 bps tighter," the trader said.

On a spread basis, Abu Dhabi and Qatar are now ahead of Russia and the Philippines, he said.

"They're still doing very well," he said.

The Philippines was trading at 120 bps bid, 114 bps offered after Monday's levels of 122 bps bid, 116 bps offered. Russia's spread was 158 bps bid, 153 bps offered versus Monday's 168 bps bid, 164 bps offered. And Qatar was seen at 156 bps bid, 145 bps offered after the previous day's 157 bps bid, 147 bps offered.

South Africa sells notes

In the primary market, South Africa priced $750 million of 6¼% notes due March 8, 2014 to yield 6.292%, or Treasuries plus 180 bps, according to an Securities and Exchange Commission filing from the sovereign.

The notes priced at the low end of talk of Treasuries plus 190 bps area.

Citigroup, Deutsche Bank and Rand Merchant Bank were the bookrunners for the SEC-registered deal.

Proceeds will be used for general governmental purposes.

This followed the late-Monday pricing of Brazil-based pulp and paper company Fibria Celulose SA's $450 million 6¾% senior notes due March 3, 2021.

The Rule 144A and Regulation S notes came to market at 99.107 to yield 6 7/8%, or Treasuries plus 345 bps.

Citigroup, Deutsche Bank and Santander were the bookrunners for the notes, which are non-callable for five years.

Shimao downsizes

Hong Kong-based residential and commercial property developer Shimao Property Holdings priced a downsized $350 million issue of seven-year senior notes (B1/BB-/) at par to yield 11%, a market source said.

The company had whispered the $500 million-maximum issue of notes in the 11% area, according to another market source.

Morgan Stanley and Standard Chartered were the bookrunners for the Regulation S-only notes, which are non-callable for four years.

Proceeds will be used to finance development projects and general corporate purposes, as well as refinance notes due 2011 and other existing debt.

Though corporate issuance has slowed since the turmoil began in the Middle East, the pace of new deals is expected to pick up soon and keep up with the level of issuance seen in 2010, said Jerry Brewin, head of the emerging markets debt portfolio for Aviva Investors.

"That's partly because of the huge infrastructure projects that EM countries are funding, a trend that will continue for many decades ahead," he said.

Demand clash on horizon

There's another reason corporate issuers will continue to come to the bond markets, Brewin said.

"We suspect lending lines from banks are more constrained than they were, with a few exceptions," he said. "Corporate borrowing needs tend to be long-term too, and the cost of borrowing long-term in the bond markets is quite low."

The monetary stimulus required by G7 economies to reduce the shock of a near-collapse of credit systems in 2007 and 2008 has had the unintended consequence of low bond yields in the United States, the United Kingdom and some parts of the European Union, Brewin said.

"At historically tight spreads to the major bond curves, EM and G7 corporates have enjoyed a period of unparalleled access to cheap funding," he said. "The worry I have in the long term is that EM GDP growth will continue over the next three to four decades absorbing a growing portion of medium-term financing just as the pool of liquidity, which emanates from EM countries themselves, will be needed for funding the old budget and current account deficits of G7 borrowers."

This, he said, could lead to a clash of demand between EM and G7.

"We suspect the conventional bond markets will everywhere suffer from inflation upticks and the eventual crowding-out impact," he said. "One way to avoid that risk in portfolios is to diversify into EM sovereign debt, especially the inflation index-linked variety. This sub-asset class of local currency EM debt presents the investor with EM FX and a real yield."

Paul A. Harris contributed to this report

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