Greece downgrade hurts sentiment, but EM stays afloat; selling abounds; VEB-leasing prices

By Christine Van Dusen

Atlanta, May 20 - As Greece remained in the news after Fitch Ratings downgraded the sovereign three levels, risk appetite took a hit on Friday but emerging markets assets managed to stay fairly solid, with Russia-based OAO VEB-leasing bringing a new issue to the market.

And several other issuers took steps toward printing new notes, including the Republic of Kazakhstan, India-focused Vedanta Resources, the Republic of Sri Lanka, Malaysia and Emirates Airline.

In trading, most of the activity centered on selling, a London-based trader said. Firming was seen for South Africa and Turkey.

"It's interesting to note all the flow has been selling as clients look to fade the rally we've had this week," he said.

VEB prints notes

In its new deal, Russia-based VEB-leasing - a subsidiary of Moscow-based lender VEB Bank - sold $400 million 5 1/8% notes due May 27, 2016 at par to yield Treasuries plus 330 basis points, a market source said.

The notes priced in line with talk, which was set at the 5¼% to 5½% area.

Credit Suisse, Goldman Sachs and VEB Capital were the bookrunners for the Regulation S deal.

Proceeds will be used for general corporate purposes.

"It launched at a tightened 5 1/8% yield on the back of it being so well-bid in the gray market," a London-based market source. "Its small size should ensure that it goes well. But it has to be in a bull market only."

LatAm issuers do deals

Friday's primary activity followed the Thursday pricing of Mexico-based broadcasting company TV Azteca SA de CV's $300 million 7½% notes due May 25, 2018, which came to the market at 98.669 to yield 7¾%, a market source said.

BCP Securities and Jefferies were the bookrunners for the Regulation S-only deal.

And Brazil's Banco do Brasil SA priced $1.5 billion 5 7/8% notes due Jan. 26, 2022 at 98.695 to yield Treasuries plus 287.5 bps, a market source said.

BB Securities, Bank of America Merrill Lynch, BNP Paribas, Banco Votorantim and JPMorgan were the bookrunners for the Rule 144A and Regulation S deal.

Proceeds will be used for general corporate purposes.

Pertamina gives guidance

Also on Friday, Indonesia-based oil and gas company PT Pertamina Persero set price talk for a 30-year issue of benchmark-sized dollar notes at 6¾% to 6 7/8%, a market source said.

The notes include a change-of-control put at 101%.

This follows the company's May 16 pricing of $1 billion 5¼% notes due 2021 at 98.097 to yield 5½%.

Sovereigns plan bonds

Kazakhstan is mulling a dollar-denominated offering of sukuk notes that could occur by September, a market source said.

Sri Lanka was planning a dollar-denominated issue of 10-year notes by the end of the year.

And Malaysia is planning a dollar-denominated issue of 10-year sukuk notes, a market source said.

The deal also is expected to price by the end of the year.

No other details were immediately available on Friday.

Vedanta taps bookrunners

Also on Friday, Vedanta Resources - a London-based company that operates India's largest mining and metals company - mandated Barclays Capital, Citigroup, Credit Suisse, RBS and Standard Chartered Bank for a benchmark-sized offering of dollar-denominated notes, a market source said.

The Rule 144A and Regulation S deal is expected to launch following a roadshow that starts May 23 and travels through Asia, Europe and the United States.

Proceeds will be used for financing a portion of the purchase price of the company's acquisition of Carin India and for capital expenditures, debt repayment and other general corporate purposes.

Airline taps dealers

From the Middle East, the United Arab Emirates' Emirates Airline mandated Deutsche Bank, Emirates NBD, HSBC and Morgan Stanley as joint bookrunners for a dollar-denominated offering of notes, a market source said.

The Regulation S deal is expected to launch following a roadshow in the Middle East, Asia and Europe.

And the final book for the UAE-based SIB Sukuk Co. II Ltd.'s $400 million issue of 4.715% sukuk notes due May 27, 2016 was $3.75 billion with more than 200 orders.

The Middle East accounted for 42%, Asia 24%, the United Kingdom 22%, Switzerland 6%, offshore United States 1% and other 5%. About 44% of the orders came from fund managers, 37% banks, 7% insurers and pension funds, 6% central banks and 6% private banks.

The notes priced on May 18 at a spread of 270 bps over mid-swaps via Standard Chartered Bank and HSBC in a Regulation S transaction.

South Africa, Turkey eyed

In trading, South Africa had another strong week, and Turkey opened firmer, though its corporates were quiet.

"We've seen better selling of bank risk from retail while the sovereign curve is still well supported," a London-based trader said. "Finansbank AS is ending the week as the outperformer, up almost a point."

He also reported good two-way flow on lender Turkiye Garanti Bankasi AS (GarantiBank) and its 2021 notes. They were seen trading at 98.875 bid, 99.275 offered on Friday after pricing at 98.086 on April 14.

Banks from Russia opened quiet and unchanged, with Alfa Bank the standout among corporates.

Defensive bias urged

It's difficult to say whether the latest adjustment in valuation for emerging markets assets has run its course - or whether there's the potential for further downside, according to a report from RBC Capital Markets.

"While it would appear that some further near-term marginal strength in EM is possible, we continue to believe that a mild defensive bias remains the most prudent strategy over the seasonally weak summer months for a number of reasons," RBC said.

Global growth momentum appears to be slow, which is likely to increase investor anxiety.

"Second, it does not look like the Greece debt crisis will be resolved imminently given sharply lacking EU consensus on a solution and a leadership void at the IMF," the report said. "This is likely to keep investors anxious over the possibility of a disorderly outcome, which may potentially create a new bout of global financial instability."

Brazil spreads 'stable'

Taking a look at a particularly active emerging market, RBC noted that Brazil's external debt spreads are stable on little demand for five-year credit default swaps.

"Investors are still in love with the Brazil story," the report said. "In our view, much of Brazil's good news is already priced in. Heavy debt issuance by quasi-sovereigns is unlikely to lift sovereign spreads. New real-denominated globals are likely to launch soon."

In a closer look at Russia, RBC reported that oil prices are underpinning the sovereign's fundamentals, supporting growth. "Look to add on any near-term further spread back-ups," the report said. "The debut seven-year ruble global saw strong demand."

Significant risks remain

Overall, emerging markets may have maintained a positive tone, but risks remain, according to a Barclays Capital report.

"We find the risk premia to be, on average, fair, but it is important to engage in careful asset selection," the report said. "We think that there will be a generally more volatile investment context with significant risks concerning the market-supportive base case. Although we believe it is most likely that EM spreads will continue to earn their keep - and think investors should remain engaged - we note that the tail risks are closer in time and larger in magnitude and we would not discourage cost-efficient hedging strategies."

Returns for EM investors have been "low and volatile," Barclays said. "Unfortunately, everything suggests that the next few months are unlikely to be much different."

Pricing of EM assets provides little protection against external shocks, the report said.

"While we think the environment is becoming riskier, we continue to believe that high-beta credits, given their large carry, still offer appropriate risk compensation," Barclays said. "Higher-quality sovereign credits, on the other hand, continue to look more expensive to us, particularly in Latin America where we maintain an underweight recommendation."

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