EM bond funds see inflows for quiet but solid week; China Oilfield to market dollar notes

By Christine Van Dusen

Atlanta, Aug. 24 - Risky assets finished off a mostly positive week - marked by solid inflows into emerging markets bond funds - on a softer note on Friday, with bonds like Russia's 2030s declining amid thin volumes and little in the way of primary market activity.

"Street volumes are considerably light as are customer inquiries, and the buy and sell inquiry ratio for customers continues to be fairly even," a New York-based trader said.

At the moment, investors are being cautious about risk, according to a report from Barclays Capital.

"Recent macro data have been inconclusive and with a heavy events calendar in September, and given the very healthy EM asset performance in 2012 so far, we think investors are unlikely to rush into strong directional risk-taking," the report said.

The morning's tone was negative, with European share markets and oil prices dropping, according to a report from UFS Investment Co.

The 2030 bonds from Russia, for example, lost about 0.15%.

"Enthusiasm about upcoming [quantitative easing] quickly waned after one of the Federal Open Market Committee members the head of St. Louis Fed had noted that released minutes are out-of-date and don't reflect new macroeconomic statistics that came out in July," the report said. "Besides, precariousness over Greece persists."

For investors who still want to dip into emerging markets bonds, long-dated notes from Sub-Saharan Africa - particularly the new notes from the Republic of Angola - and Croatia and Latvia may be a good bet, Barclays said.

"But we suggest reducing duration and legging into credit default swap protection in Asia to mitigate potential volatility," the bank said.

Barclays also recommended that investors shorten their duration in cash bonds from Indonesia and look to increase exposure to bank bonds from India.

"We suggest buying protection in Malaysia and Korean commercial banks versus the Korea sovereign to cushion against tail risks," Barclays said.

China Oilfield plans roadshow

COSL Finance (BVI) Ltd., a subsidiary of Beijing-based oil and gas company China Oilfield Services Ltd., will set out on a roadshow starting Monday for a dollar-denominated issue of notes, a market source said.

The marketing trip will travel to Hong Kong, Los Angeles, Singapore, Boston and London before concluding on Wednesday in New York.

The company recently issued a press release with information on the planned offering, which will be a Rule 144A and Regulation S transaction.

BOCI Asia, Citigroup, UBS, China Merchants Securities, Credit Suisse, DBS Bank, Deutsche Bank, Goldman Sachs, HSBC and JPMorgan are the bookrunners.

Proceeds will be used for general corporate purposes.

The notes will be guaranteed by the parent company.

Trader eyes Guangzhou notes

The recent $238 million add-on to Chinese real estate company Guangzhou R&F Properties Co. Ltd.'s 10 7/8% senior notes due 2016 - which priced this week at 97.061 - came to the market at too much of a discount, a Singapore-based trader said.

The original issue that priced in April 2011 totaled only $150 million and was therefore illiquid, which took a toll on the pricing of the tap.

Since pricing, the bond has rallied two points, moving it back to where it was trading before the tap was announced.

Citigroup, Standard Chartered Bank and UBS were the bookrunners for the Regulation S sale.

Proceeds will be used for offshore expansion opportunities, for general corporate purposes and to fund an interest reserve account.

Chinese issues struggle

Many recent deals from China have struggled as problems with China industrials have set the bar high in terms of what the market will take, the Singapore trader said.

Investors are more interested in issues from property companies like Guangzhou R&F. But these issuers typically need less funding than other Chinese corporates.

In general, accounts from Europe and the United States have shown consistent appetite for high-yield emerging markets debt, the trader said.

"When we go to visit clients in the US and Europe, we find a good level of literacy on the region, so there is plenty of interest."

Latin America in focus

Looking to Latin America, weakness continued for bonds from Argentina and Venezuela on Friday morning after Wednesday's rally, the New York-based trader said.

Other names were firmer at the end of the week - including Mexico, Brazil, Colombia and Peru - with the help of an uptick in US Treasuries.

"We've seen firmer bids in Mexico get hit this morning," he said. "We've also seen Peru's 2033s trade at 172.15."

On the corporate side, most Latin American names were unchanged from Thursday's session.

"We are, however, experiencing wider spreads on Petroleo Brasileiro SA (Petrobras) and Vale SA paper and we are considerably lower in price on the long end of Vale paper," he said. "Overall the tone is still firm as are levels on most credits, although some high-grade credits look a little softer on little to no volume."

Corporate issuance declines

Corporate issuance for the second quarter of 2012 dropped to €132 billion from €200 billion in the prior quarter amid concerns about sovereign debt and economic growth, according to a report from Fitch Ratings.

"The market appears to be holding up despite the 2.7-times higher composite downgrade volume in the first half of 2012 compared to the first half of 2011," the report said. "This bodes well for the rest of the year if familiar risk-on themes resurface."

Total issuance by financial companies declined 9.8% to €473 billion in the year-to-July as compared to the same period a year ago.

"The decline was due solely to the diminishing portion of senior unsecured issuance by banks, which dropped 28% to €182 billion," Fitch said. "At this volume, senior unsecured bonds accounted for only 43% of bank new issuance, the first time the share has fallen below 50%."

EM bond funds see inflows

Emerging markets bond funds marked their 11th straight week of inflows this week, with $426 million, according to a report from data tracker EPFR Global.

About $250 million of that total went to funds with hard currency mandates, said Cameron Brandt, director of research with EPFR.

Year-to-date, emerging markets bond funds have seen inflows of $30.8 billion, he said.

"Emerging Asia remains the preferred choice for investors looking for regional exposure," EPFR's report said. "Overall flows were under half the year-to-date weekly average of $992 million."

Paul A. Harris contributed to this article.

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