EM more upbeat with higher stocks; Venezuela, PDVSA mixed, trading with accrued interest

By Rebecca Melvin

New York, Nov. 16 – Emerging credit markets were more upbeat on Thursday compared to earlier in the week as global stock markets and U.S. Treasury yields traded up and the CBOE volatility gauge continued to come back in from a spike Wednesday morning.

Stock markets in Hong Kong, Japan, France, Germany, Brazil and Chile were all higher by more than 0.5% on Thursday, as were the United States’ S&P 500 stock index, Nasdaq stock market and Dow Jones industrial average.

The gains followed several days of volatility and selling, which analysts chalked up to profit taking that was not unusual given the previous steady upswing.

Even the market for Venezuela and Petroleos de Venezuela SA felt healthier, although the two entities ended mixed on the day, with the Venezuela curve finishing lower by ¼ point to ¾ point and the PDVSA curve ending higher by the same amount.

A U.S. trader specializing in this paper was unsure what was behind the mixed finish but said that everything was lower to start and improved intraday.

On Wednesday, the Emerging Markets Trading Association recommended that traders continue to trade Venezuela bonds with accrued interest and not flat as some traders had started doing following the S&P Global and Fitch ratings declaration on Monday that two bonds were in default.

The EMTA said that its recommended market practice was made following consultations with major market participants.

In fact, the list of bonds in default regarding coupon payments is much longer than just two bonds and includes PDVSA notes due 2027, 2019 and 2024, and with PDVSA notes due 2025 and 2026 to join the list on Nov. 21, a trader said.

But Corporacion Electrica Nacional (Corpoelec), known as Elecar, has paid interest on its 8½% notes due 2018, the trader said. “So everyone is thinking if Elecar got paid, the other bonds will get paid.”

Venezuela president Nicolas Maduro had said that the government would not pay any more on its international debt after the PDVSA 2017 notes due Nov. 2 were paid. But Elecar was paid, and the government is now saying payment is being made on the Venezuela 2019 and 2024 coupons.

“Nobody knows. But we should be expecting big news in the next few days. There is some risk of headline news one way or the other,” the trader said.

The coupon payments could arrive or, on the other hand, something like lawyers for a group of PDVSA supplier promissory note holders that are also in arrears could ask for acceleration of payment.

In general, the near-dated Venezuela, PDVSA bonds were trading around the mid-20s on Thursday, and the longer-dated maturities were in the low- to mid-30s.

Venezuela’s 2022 notes were quoted 29¼ bid, 30¼ offered at the end of Thursday, which up from 26 bid, 28 offered on Tuesday.

Elsewhere, emerging markets saw a little bit of spread tightening across the board early on Thursday, with some exceptions such as Croatia, a London-based trader said.

Many Middle Eastern credits were one to several basis points better. But a weak name was Saudi Arabia-based property developer Dar Al-Arkan Real Estate Development Co., which was still well offered after investors began to swear off Qatar’s Ezdan Holding Group 2021 and 2022 notes early in the week. Ezdan is also a real estate property developer.

Dar Al-Arkan’s near-dated bond, the 5¾% notes due 2018, was at 99 bid, 100 offered with a spread wider by 2.3 bps on Thursday. But Dar Al-Arkan’s newest bond, the 6 7/8% Islamic bonds due 2022, was down to 92½ bid, 95 offered, with its spread wider by 76.5 bps.

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