EM debt better as currencies, broader markets recover; Frontera brings $350 million deal

By Rebecca Melvin

New York, June 20 – Emerging markets debt improved on Wednesday after weakening on Tuesday when a global rout hit the space.

Many emerging markets currencies strengthened, including the South African rand and the Brazilian real, which was a little shaky in the early going but appeared ready to consolidate after a plunge heading into the close on Friday.

“It’s a little firmer, but I don’t expect any new issues this week,” a London-based market source said of the Central & Emerging Europe, Middle East and Africa region.

But Latin America-focused Frontera Energy Corp. took advantage of a more stable market, launching a $350 million offering of five-year notes to yield 10% on Wednesday.

The deal was increased from an initial offer size of $300 million but was down from the $500 million size talked when the deal was originally announced early this month.

BofA Merrill Lynch, Citigroup, HSBC, Itau BBA and J.P. Morgan are bookrunners for the Rule 144A and Regulation S notes, which are non-callable for three years.

Frontera is a Toronto-based explorer and producer of crude oil and natural gas.

Back in the secondary market, Turkey was an exception to the general improvement on Wednesday. Its bonds and the lira weakened for a second straight day amid investor worries over that country’s road to reigning in inflation.

Ahead of the country’s presidential election on Sunday, president Recep Tayyip Erdogan pledged to lower interest rates if re-elected.

In addition to currencies and stocks, crude oil prices improved on Wednesday and were last up more than 1%.

Petroleo Brasileiro SA’s bonds were moving higher on Wednesday.

Petrobras’ 7 3/8% notes due 2027 were at last around 99, which is up about half a point on the day.

Brazil bonds add

Despite a broadly better market for Brazil’s sovereign and Petrobras bonds – the sovereign bonds looked to be up by not quite a point on Wednesday – the tone in this market continues to be negative, a New York-based market source said.

The Brazilian real seems to have stabilized somewhat but overall there is not a lot of encouragement, the source said, noting problems on two fronts: the truckers’ strike, which has put a dent on growth this year; and no market-friendly candidate running in the upcoming presidential election in October.

“Nothing is happening that is giving people any comfort that there is going to be a market-friendly candidate. All the polls continue to show not very market-friendly people in the lead,” the source said.

In general, there is very little trading in the bond market beyond the sovereign and Petrobras bonds, and while the bonds are up a bit, that is just off the lows for the year hit on Monday, the source noted.

“Brazil is suffering more than others” because of the election and such things as the truckers’ strike, which has caused the economy to get worse.

“People also question whether they [the government] are going to be as consistent as they were in applying free-market rules in Petrobras,” the source said.

While the replacement for Pedro Parente, who resigned unexpectedly as Petrobras chief executive officer on June 1, was formerly the chief financial officer under Parente and represents a continuation of Parente, “he is only a placeholder until the election when the new person will choose someone” to run the state-run energy company, the source said.

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