EM slides but still beats high yield; high-beta Asia, Latin America wider; Harmony plans $350 million

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, July 10 - Emerging markets bonds slid badly Tuesday in response to renewed jitters in the U.S. financial markets over weakness in the subprime lending industry, and what ripple effects it might have beyond that.

While U.S. Treasuries rose smartly, the perceived flight to safety was seen as discouraging investors from staying in riskier asset classes, such as emerging debt.

EM bonds fell pretty much across the board, with both Asian issues and Latin American names on the downside. Among the former group was the widely traded Philippines government debt, with the credit default swaps contracts linked to those bonds widening out markedly.

Among the Latin American issues, the risky, high-beta names like Venezuela and Ecuador fell, as could be expected. Argentina was another loser. But even investment-grade-rated Mexico's bonds were seen lower.

Meanwhile in the primary market one familiar issuer, Kazakhstan's Bank TuranAlem, tapped its existing 8¼% notes due 2037 to the tune of $250 million.

And the forward calendar, which built exuberantly on Monday, took aboard a couple of more passengers during the Tuesday session, including South Africa's Harmony Gold Mining Co. Ltd., which is in the market with a $350 million offer.

A buyside source who spoke to the Prospect News emerging markets primary market desk on Tuesday described current conditions as "delicate."

"There's a nicely stocked pipeline," the source said, but added that there remains a question as to how much of an appetite for risk investors really have.

Compared to the first four months of the year, issuers may now have to pay an extra 50 basis points, the source said.

"The credit market is pulling its horns in for the first time in a long time," the source added.

"Lenders are revisiting risk return considerations."

The appetite for risk

Overhanging the EM market was investor concern about the U.S. subprime crisis, which deepened on Tuesday as Moody's Investors Service lowered the credit ratings on over $5 billion of bonds backed by subprime mortgages - while Standard & Poor's said it may cut the ratings on as much as $12 billion of debt.

And - stung by criticism that they were behind the curve on the subprime meltdown - the agencies indicated that more downgrades could follow. S&P said it is also reviewing what it called the "global universe" of collateralized debt obligation structures that contain subprime mortgages. By some estimates, investors in CDOs alone stand to lose as much as $250 billion when the dust finally settles.

This latest bad news related to the subprime lenders, who are accused of having made shaky loans to poor credit-risk borrowers who could not keep up with their obligations and who in many cases defaulted, sent a chill through Wall Street, where stocks tumbled, particularly those of builders and retailers, as investors worried about their profit outlooks. Meanwhile, Treasuries zoomed, with the yield on the benchmark 10-year note shrinking 11 basis points to 5.027% - the biggest one-day jump since the Chinese stock market induced panic in late February.

With Treasury yields having come in, spreads between Washington's paper and EM debt were seen to have widened out substantially, with the widely followed EMBI+ index compiled by JP Morgan & Co. quoted as having widened a yawning 13 bps to 175 bps. That matches recent peak levels for the index, nearly 30 bps above the all-time tight spreads in the upper 140s seen in late May and early June - and not far below the bloated levels in the 190s to which the index had widened out in the aftermath of the Chinese stock collapse.

Still outperforming high yield

A New York-based trader in Asian bonds declared that the market "got shellacked," although he added the caveat that things were "not incredibly active, for the most part. But I think that definitely there was a weaker tone which had carried over from the high-yield market in the morning and from equities during the course of the day."

He said that at his shop, "we saw this general weakness in the high yield market, with a lot of the European indices 20-plus wider, this morning. That carried over to the emerging market sector."

The latter, he said, "pretty much outperformed the high yield sector yet again over the last couple of months.

"In the last month or so, we've seen high yield spreads widen by about 75 [bps] while emerging markets has widened by about 25 [bps]."

While EM picked up on the declines in other markets, he said, "there was a weak tone throughout, but there wasn't a whole lot of selling. We were a good 10 [bps] or so wider across the board in Asia."

One such wider name was the five-year CDS contracts linked to Philippines government debt. The spread - which on Monday had been seen in a 108-110 bps context - finished Tuesday's dealings at 121-123.

The Asian nation's benchmark 2032 bonds traded at 96.25 bid, 96.50, down about ¼ point.

In the corporate sphere, things were "kind of quiet. We saw the highest beta names tending to fare the worst."

He said a lot of the corporate activity that New York traders were watching had taken place overnight, during the Asian trading day. He saw "some buying interest" in Woori Bank's 2037 bonds, with "decent buying activity."

He said the Chinese property sector "as a whole remains a little weak here - but there was not a whole lot of flows today."

Latin America mostly down

In Latin American dealings, most bonds were seen lower, with Venezuela's benchmark 9¼% dollar-denominated bonds due 2027 quoted having fallen 0.60 on the session to 108. Their yield rose 6 bps to around the 8.40% area.

The risky bonds of the other two members of what some analysts only half-jokingly term "the gang of three," Ecuador and Argentina, were lower, with Quito's 10% notes due 2030 falling 1½ points to end at 80.75 bid.

Argentina's prices slipped by an average of 0.2%, with its peso-denominated discount bonds seen down 0.8% on the Buenos Aires Stock Exchange and down 0.4% in over-the-counter trade.

Mexico's 10% peso bonds due 2024 lost about ¼ point to finish below 121.70.

TuranAlem returns

Meanwhile in the primary market, Kazakhstan's Bank TuranAlem priced a $250 million add-on to the 8¼% notes due 2037 (Baa3/BB/BB+) it issued in January of this year.

In a deal that was led by Deutsche Bank, the new bonds priced at 95.00.

In January TuranAlem sold $750 million of the notes. Hence Tuesday's sale raises the total to $1 billion.

Deutsche Bank was the bookrunner for the deal.

Meanwhile Russia's X5 Retail Group priced 9 billion rubles of 7.6% seven-year bonds to yield 7.74%.

ZAO Raiffeisenbank Austria and Bank VTB are lead managers.

In a press release, Dmitriy Milshtein, group head of treasury, said: "We are very pleased with the terms of the issue and the high level of demand for our bonds, which demonstrates the confidence of the investment community in our company. The success of the issue clearly shows the support of the market for X5's investment strategy."

Talking the deals

Romania's Telemobil SA released talk in the 10.5% area for its $125 million offering of seven-year senior unsecured bonds (B3/B-).

Pricing is expected Wednesday.

Elsewhere Russia's BSPB Finance SA, the issuing vehicle for Bank of St. Petersburg, set price talk for its 10-year subordinated bonds (B1) at 10½%.

UBS and JP Morgan are running the books.

The roadshow ends Wednesday and the deal is expected to price this week.

Bahrain's Gulf Financial House set talk for its dollar-denominated offering of five-year floating-rate notes (BBB-) at the Libor plus 125 basis points area.

Dresdner Kleinwort and HSBC are the bookrunners.

The deal is expected to price this week.

Two new corporates

Neo China Group (Holdings) Ltd. one of two new players in the market, wrapped up its roadshow for a benchmark-sized seven-year guaranteed issue (B1/B+) with detachable warrants for 15% to 20% of the company, however no price talk was heard.

The bonds also have a five-year put option.

Deutsche Bank and Bank of China International have the books.

Neo-China is a Hong Kong-based property developer.

Meanwhile South Africa's Harmony Gold Mining Co. Ltd. announced plans to sell $350 million seven-year senior notes (//BB+).

The bonds are non-callable for four years.

Morgan Stanley is the bookrunner for the deal which is expected to price on July 19.

One on hold

PKN Orlen placed on hold its proposed issue of €1 billion seven-year senior unsecured notes (Baa3).

Price talk had been set at mid-swaps plus 100 basis points.

ABN Amro, BNP Paribas, Citigroup and SG Corporate and Investment Banking had the books. ING and Unicredit were joint leads.

PKN Orlen issued a statement claiming that the company is not currently under pressure to raise financing and postponed the transaction until "a more stable and constructive environment" can be found, the statement said.

The Polish government owns a 27% stake in the company in the Plock, Poland-based refining and petrochemical company.

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