Outflows reported for EM bond funds; Al Hilal notes trade up, Sabic down; OGX bonds dip

By Christine Van Dusen

Atlanta, Oct. 4 - Emerging markets bond funds this week recorded their biggest outflows since the fourth quarter of 2003 as optimism about quantitative easing gave way to concern about the U.S. government's partial shutdown.

"Flows into fund groups dedicated to riskier assets, which began to pick up in late September after the Fed decided not to taper quantitative easing in October, faltered again as parts of the U.S. government began to shut down and the space under the current debt ceiling dwindled," according to data-tracker EPFR Global.

Sovereign funds suffered more than corporate-focused funds, with sovereign funds seeing double the redemptions in terms of dollars and percentage of assets under management.

"Investors pulled similar amounts out of both hard and local currency funds and, at the country level, relieved Brazil bond funds of over 7% of their assets under management," the report said.

In trading at the end of the week, the new issue that Abu Dhabi's Al Hilal Bank priced at par moved to 101 bid, 101.25 offered.

And the recent notes from Saudi Arabia-based Saudi Basic Industries Corp. (Sabic) - $1 billion 2 5/8% five-year notes that priced at 99.449 - ended the week near 99.15 bid, 99.35 offered.

The notes came to the market at a spread of Treasuries plus 130 bps via Citigroup, HSBC Securities, Mizuho Securities and RBS Securities Inc. in a Regulation S deal.

The final book was $5.2 billion from 280 accounts, a trader said.

Also on Friday, Poland was planning a non-deal roadshow.

This news came as National Bank of Poland president Marek Belka told the Polish Press Agency that the sovereign is "in a slightly better situation" than other emerging markets and would not be badly hurt by the U.S. government shutdown.

OGX notes tumble

Brazilian oil producer OGX Petroleo e Gas Participacoes SA remained in focus on Friday after missing a $44.5 million coupon payment earlier this week. Though that was largely expected, Thursday's news regarding oil reserves at the company's only viable field, Tubarao Martelo, proved to be a disappointment.

So though OGX's notes didn't really budge on the coupon-payment news, the company's notes did fall on the news that the Tubarao Martelo oilfield had about 87.9 million barrels of oil product, less than 1/3 of what the company had originally forecast.

On that news, OGX's 8½% notes due 2018 moved down 3 points to 9 and its 8 3/8% notes due 2022 moved down 4½ points to about 91/4.

The Brazilian oil producer, majority-owned by Eike Batista, is working with advisers from Blackstone Group LP and Lazard to go over options as money runs out. The buzz is that a bankruptcy will come by Nov. 1.

Ukraine, Naftogaz in focus

Looking to Ukraine, bonds headed into the end of the week a bit lower amid rumors that Naftogaz had not paid its coupon, said Svitlana Rusakova of Dragon Capital.

The company previously announced that it had paid a coupon on Sept. 30 but by Oct. 3 the bondholders had not yet received the money, she said.

"However, most investors seemed to believe the Finance Ministry's later explanation that this was due only to some technical delay," she said.

As a result, Naftogaz's 2014s didn't lose much ground in trading toward the end of the week, she said.

"The long end of the sovereign curve closed over a point lower," she said. "The short end was also down a point, but Naftogaz was only a 1/2-point off Wednesday's levels."

The lowest print at mid-week was 93.5.

Other corporates saw two-way flows, she said.

'Uncomfortable zone'

Credit default swap spreads for Central European countries have been steadily narrowing, according to a report from Erste Group Research.

Croatia, for one, has moved into an "uncomfortable zone" at about 330 bps, "with fundamental weakness weighing on the risk profile," the report said.

The sovereign suffers from negative news flow, challenges with its fiscal framework and "hefty financing needs," Erste Group said.

"Therefore, we would see the risk profile improving only courtesy of a supportive global sentiment, while we see a high likelihood of underperformance versus the peers."

Czech CDS near lows

Five-year credit default swaps for the Czech Republic have risen about 10 bps since May but remain close to historical lows, Erste Group said in its report.

They're now trading at about 60 bps.

"Having been as high as 200 bps at the end of 2011 and as high as 130 bps in summer 2012, the fall to 50 bps of 60 bps is evidently the consequence of the stabilized situation in the euro zone, helped, to an extent, by the improved public finances of the Czech Republic," the report said.

The bank expects that Czech CDS will not continue to fall from current levels.

Swire oversubscribed

The final book for China-based conglomerate Swire Pacific Ltd.'s $700 million issue of 4½% 10-year notes was about $3 billion from more than 225 orders, a market source said.

The notes priced at 99.403 to yield Treasuries plus 195 bps with HSBC and JPMorgan in a Regulation S deal.

About 83% of the orders came from Asia and 17% from Europe, with 32% from fund managers, 31% from insurers, 17% from banks, 15% from central banks and 5% from private banks.

Final book from First Gen

The new deal from Philippines-based power generator First Gen Corp. - a $250 million issue of 6½% 10-year notes that priced at par to yield Treasuries plus 389.5 bps - drew $350 million in orders from about 60 accounts, a market source said.

About 60% of the orders came from the Philippines, 33% from other Asian countries and 7% from Europe.

Banks accounted for 65%, fund managers 14%, insurers 11% and private banks 10%.

Deutsche Bank, HSBC and JPMorgan were the bookrunners for the Regulation S deal.

Impact on EM

Many emerging markets are likely to struggle in the shadow of the U.S. governmental crisis, EPFR said in its report.

"Investors now expect that, by way of deliberate action on the part of the Fed or as a consequence of political gridlock, U.S. borrowing costs will keep rising," the report said. "This will slow but not stop the current recovery in the U.S. economy but will make life more difficult for emerging markets, especially those with above-average inflation rates or current account deficits."

Japan and Europe will become more appealing to investors, the report said.

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