SM Investments prices; Fertinal cancels deal on quiet day; EM bonds rally; PDVSA swap eyed

By Christine Van Dusen

Atlanta, Oct. 7 - New deals were scarce on Thursday - and at least one vanished - even as emerging market debt took on a rosy glow in light of quantitative easing efforts underway or in the works around the globe.

"It seems fairly quiet," a Toronto-based market source said.

Just Philippines-based SM Investments Corp. priced a deal, and Mexico's Grupo Fertinal SA de CV postponed, most likely due to the current level of supply and the fact that investors can afford to be picky these days.

"The market remains in bull mode, thanks to the underlying Treasury gains," an emerging markets strategist said. "We've seen a huge rally."

This comes as the Bank of Japan plans to drop its interest rate to near zero, following quantitative easing from the U.S. Federal Reserve. Other central banks, including those in Canada and Australia, are expected to follow suit.

"Everything is geared toward the need for additional monetary easing in order to offset the fiscal contraction in developed markets," the strategist said. "As developed economies try to bring down their total debt loads and reduce fiscal deficits, there's going to be some additional easing to offset that. So everyone favors debt right now, and emerging markets are included."

Valuations, meanwhile, are "becoming a little stretched," he said. "Perhaps too much money is coming into EM. We need a good sell-off."

Spreads tighten

The JPMorgan Emerging Markets Bond Index Global Diversified spread was tighter by 4 basis points by mid-afternoon on Thursday before closing down 5 bps.

"When you see the Treasuries rally and EM debt bond spreads tightening, that means that the bonds are rallying and the prices are rallying in excess of the Treasury gain," the strategist said. "So it's more than just the Treasury action."

Venezuela's benchmark bonds were tighter by 11 bps at mid-afternoon before finishing the day 10 bps tighter. Peru was tighter by about 8 bps.

Argentina, in particular, is benefiting from the "rising wave" of intervention and capital controls intended to curb currency appreciation, according to an RBC Capital Markets report.

"We see this as a potentially favorable development for Argentine external debt," the report said.

Meanwhile, Mexico is seeing rising portfolio inflows into local bonds and remains "cheap" in terms of valuation, which should contribute to firmness for the sovereign as it heads into year-end.

"Abundant global liquidity has cascaded from higher-grade products into higher-yield, as higher-grade spread compression drives investors to continually trickle down the quality ladder to find yield," the report said. "The current beneficiaries appear to be EM domestic debt and lower-grade external debt."

Overall appetite for EM risk should "strengthen into year-end, and the highest yielding assets stand to benefit most," the report said.

PDVSA could do swap

Also from Latin America, state-owned oil company Petroleos de Venezuela SA (PDVSA) got some attention on Thursday as market-watchers whispered about a possible exchange solicitation for about 50% of its 2011 bonds for the planned new issue of 2018 notes.

The company is expected to offer $1.35 of new 2018 bonds for each $1 of bonds outstanding, though the issue size could increase to the predicted $3 billion depending on whether the swap is successful in achieving the proposed threshold of 50% participation.

"Investors could be motivated to participate at a price," according to a Barclays Capital report. "On the other hand, the 2011 notes exhibit remarkable resilience in down markets, whereas new 2018 notes would likely be as volatile as the existing 2017 notes."

That, Barclays wrote, "will very likely form part of investors' considerations."

The deal "could improve the company's debt maturity profile in the short term," the report said. "From a credit perspective, the exercise would improve the company's front-end maturity profile, although it would result in increasing leverage."

The issuance of the 2018 bonds has been "delayed for another week or so," another strategist said. "I generally think that's going to result in more new supply for the near term than was initially anticipated, but I think it will probably have a temporary impact."

There is some talk that "the new bond could be under New York law as opposed to local law. If that sweetener is added, it could alleviate the $3 billion amortization hump for next year and make people more confident in terms of any sort of default scenario," he said. "That would significantly lighten the amortizations for next year, so I think that would generally be quite positive."

The swap "would make total sense for them to do," he said.

Century bond in focus

Investors were also talking again about Mexico's recent pricing of $1 billion 5¾% notes due 2110 and how the success of the issue might inspire other sovereigns to consider century bonds.

Pacific Investment Management Co. made some comments to that effect, the Toronto-based market source said.

Brazil, he said, is among the countries that might consider such a transaction.

"That would make sense," he said. "I think that the yields were quite attractive, if you look at it from a long perspective. So I think it makes sense for a lot of issuers to try to secure yields this low and improve their maturity profile."

On Thursday, though, no such deals came to market. The only new issue of note was the $186.3 million 5½% bonds due 2017 that priced at par from Philippines-based commercial property developer SM Investments.

The company will also issue $213.7 million of the bonds in an exchange offer for its outstanding 6¾% bonds due 2013 and 6% bonds due 2014, bringing the total amount of new bonds to be issued to $400 million.

The new bonds, via Citigroup and HSBC, carry the lowest coupon ever for a Philippine corporate bond issue.

Slovak Republic prices notes

This followed Wednesday's pricing of the Slovak Republic's €2 billion 4.35% notes due 2025 at 99.751 to yield 4.373%, or mid-swaps plus 150 bps, according to a press release.

HSBC, SG CIB, Tatra Banka and Unicredit were the bookrunners for the Regulation S-only transaction, which was talked at mid-swaps plus 150 bps to 155 bps.

The issue was upsized from €1 billion and closed its books with €4 billion.

Proceeds will be used to enhance the sovereign's liquidity and improve its debt maturity profile.

"Slovakia intends to reopen this issue through domestic auctions at a later stage" for up to €3 billion, the release said.

The investor base included 25% from Germany, 15% from Austria, 12% from France, 12% from Western Europe, 10% from the United Kingdom and Ireland, 9% from Italy, 9% from Eastern Europe, 3% from the Nordics, 2% from Switzerland and 3% from other areas.

Funds accounted for 42%, insurance companies 39%, banks 18% and others 1%.

In other deal news, market-watchers were whispering Thursday about a possible $1 billion issue from India-based lender Icici Bank Ltd.

Fertinal shelves deal

The relative quiet in the primary isn't necessarily tied entirely to the abundance of supply, the strategist said.

"I don't think it's indigestion," the strategist said. "All these bonds are getting snapped up."

But current conditions and investor interest may have led to the demise of at least one deal on Thursday.

Mexico-based phosphate fertilizer producer Grupo Fertinal canceled its expected issue of up to $250 million in five-year notes, a market source said.

Price talk for the notes, via UBS, was first whispered at 12% and then revised to 13½%.

Other details were not available.

Also on Thursday, Russia-based lender Sberbank's planned re-tap of its $1 billion 5.4% loan participation notes due 2017 was whispered to yield in the 5¼% to 5.35% area, a market source said.

The original issue priced on Sept. 17 at par to yield 5.4% via Barclays, BNP Paribas and ING.

And market sources also say that Beijing-based medical device company China Medical Technologies Inc. could be postponing its planned notes due 2015 via Deutsche Bank and Standard Chartered.

QTel oversubscribed

In other news, the new $1.5 billion issue of notes due 2016 and 2020 from Qatar-based telecommunications subsidiary QTel International Finance Ltd. was oversubscribed by more than 10 times, according to a company announcement.

The deal included $500 million 3 3/8% notes due 2016 that priced at 99.243 to yield 3.516%, or Treasuries plus 235 bps.

The issuer also sold $1 billion 4¾% notes due 2020 at 99.161 to yield 4.855%, or Treasuries plus 245 bps.

Barclays Capital, Deutsche Bank, Mitsubishi UFJ Securities, Qatar National Bank, Standard Chartered Bank and RBS were the bookrunners for the Rule 144A and Regulation S transaction.

The deal attracted global orders "in excess of $15 billion," the company said, noting that the proceeds will be used for general corporate purposes, including refinancing existing debt.

Angela McDaniels contributed to this report

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