Emerging market spreads tighten, market firms on ECB comments; CEZ, GeoPark Chile price

By Christine Van Dusen

Atlanta, Dec. 2 - The somewhat vague and lackluster comments on Thursday from the European Central Bank did manage to offer some comfort to emerging markets investors and issuers, leading to a firmer market, tighter spreads and new deals from Czech-based CEZ AS and GeoPark Chile Ltd.

"To my mind Trichet was as obtuse as usual and refused to answer any questions clearly. But the dealing desk at the ECB was actively buying Ireland, Greece and Spain, reportedly," said Jerry Brewin, head of the emerging market debt portfolio at Aviva Investors.

But while Trichet didn't go so far as to say that the ECB's bond-buying program would be increased, his comments did remind the market that debt purchases are ongoing and a system of liquidity support is in place.

"We're taking our cues from the rest of the world," a New York-based market source said. "The market has a firm tone to it."

Market stabilizes

Overall, "the market is trading OK," he said. "That doesn't mean that if we have another round of selling in equities and Europe decides to fall apart we won't go lower, but for the time being it's OK."

Though last week saw outflows from emerging markets bond funds for the first time in 25 weeks, "the market seems to have stabilized for the time being," he said. "It's really because there's been a lack of bad news after everything in Europe and the sabre-rattling in Korea."

There's some pressure on credits in Eastern Europe and Asia, he said. "Things are widening," he said. "But it's more of a gridlock situation with not too many guys involved in the market."

Latin America, he said, is faring a bit better. Brazil's 2021 bonds, for example, were trading as wider on spread to Treasuries of plus 140 basis points on Tuesday. That narrowed to 115 bps on Thursday, he said.

"The Argentina Boden 2015 bonds traded as low as 90 and they're now with a 93 handle, 93¼ mid-market," he said. "That's illustrative of what we're seeing."

Inflows to resume

December is typically a good month for risk assets, Brewin said.

"So I think portfolios will be happy adding small risk toward neutral and, in some cases, buying for the expected risk-on in January," he said. "We think fund inflows will resume in early 2011."

He called himself "cautiously bullish" on credits like Argentina, but "nervous about the U.S. Treasury market," he said. "It sold off toward a 3% yield today, crossing 3% briefly. If U.S. Treasury yields were to rise to 3.20 by year-end it would damage the long-end of many investment-grade EM bond curves, but of external debt and possibly currency debt curves too."

Mexico, he said, could have the greatest correlation risk.

Returns could falter

Looking ahead, Brewin - who manages $2.5 billion of EM debt - is assuming there will be no change in U.S. monetary policy and a trading range of Treasury yields of between 3.5% and 2.5%.

"That doesn't look very brave, given we are right in the middle of that range today," he said. "But that is what we were thinking last month too."

He also expects EM external debt spreads will tighten to the Treasury curve, but only by 50 bps from the current 300 bps.

"That means next year will not be a stellar year for absolute returns," he said.

Brewin is favoring equity markets over bonds for 2011, he said. "But a lot may depend on the ability of the ECB to control and manage the stress of both bank and sovereign debt in the euro zone next year."

CEZ, GeoPark do deals

In new deal news, the Czech Republic-based power distribution company CEZ priced a €250 million add-on to its existing €500 million 4½% notes due June 29, 2020 at 98.658 to yield 4.674%, or mid-swaps plus 155 bps, a market source said.

Citigroup, Erste, ING and Societe Generale were the bookrunners for the Regulation S-only transaction, which was talked at a spread of mid-swaps plus 145 bps to 160 bps.

Also coming to market on Thursday: Oil and gas company GeoPark Chile, Agencia en Chile's $133 million 7¾% notes due Dec. 15, 2015. Other pricing details were not available Thursday.

Celfin International Ltd. of Chile was the bookrunner for the Regulation S transaction.

The offering allows for the placement of an additional $27 million under the same indenture.

Proceeds will be used to support the company's growth strategy and improve its fiscal flexibility by repaying a portion of existing debt and funding strategic growth plans.

Market sources were also whispering on Thursday about a possible eurobond issue of notes from JSC Russian Railways in 2011.

© 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.