Emerging markets ends week with a slide; trading weak, but 'holding in;' primary sees two benchmarks

By Aaron Hochman-Zimmerman

New York, Oct. 19 - Emerging markets investors were glad to see the weekend after a rocky day in the sector Friday.

In trading, yields widened, particularly in Latin America, as liquidity became harder to find on a Friday afternoon.

"Liquidity is becoming a problem outside of the bellwether bonds," a trader said.

Wildly fluctuating Argentina posted the biggest loss of the day. Its 8.28% discount notes due 2033 dropped 1 point.

The primary market produced a new samurai sovereign issue from Hungary worth ¥25 billion in addition to a $2 billion corporate bond from the United Arab Emirates' Abu Dhabi National Energy.

Political headlines were still easy to find.

As Pakistan dusted off from the attempted assassination of former prime minister Benazir Bhutto on Thursday, another bomb detonated in a shopping mall in the Quezon City section of Manila, Philippines.

"The market has really shrugged off that news, as a whole that is not viewed as a market-moving event," the trader said.

But the market could not shrug off skyrocketing volatility, which hung close to 20.00 until shooting up to 22.96 at the close, according to the VIX index. The index, which gained a total of 4.46, is the standard measure of market volatility.

As a sector, emerging markets showed its suffering by adding 13 basis points to JP Morgan's EMBI+ index which was seen with a spread of 207 bps, its widest level in four weeks. The index gauges the amount of extra yield investors require to take on emerging markets risk.

Primary prices two benchmarks

The primary was able to shine over a lackluster day in trading. Abu Dhabi National Energy and Hungary both priced benchmarks. Meanwhile two more deals stepped onto the field.

The United Arab Emirates' Abu Dhabi National Energy priced $2 billion of bonds (Aa2/ AA-/) on Friday in two tranches.

The five-year tranche has a 5.62% coupon and priced at par with a spread of Treasuries plus 155 bps. The five-year bonds were talked earlier at Treasuries plus 150 basis points.

The 10-year bonds have a 6.165% coupon and were also priced at par with a spread of Treasuries plus 175 bps. The bonds were talked at Treasuries plus 175 bps.

The talk "was wider than we were expecting," a syndicate source said.

Citigroup and Toronto Dominion had the books for the bonds.

The offering, a source familiar with the deal said, has been "hanging around for quite some time."

Hungary priced a ¥25 billion 10-year samurai bond (A2/BBB+/BBB+) at par with a spread of 27 basis points over yen Libor.

The deal priced with a coupon and yield of 2.11%.

Mizuho Securities and Nikko Citigroup brought the deal to market.

Proceeds from the sale will be used for general financing.

Corporates announce

India's Rain Calcining Ltd. announced plans to offer $235 million in seven-year senior subordinated notes (B2//B).

Citigroup will act as the bookrunner for the bonds, which will mature in 2015.

Proceeds from the sale will be used to repay a bridge loan facility and to complete the acquisition of CII Carbon LLC of Kingwood, Texas.

Rain Calcining is a Hyderabad, India-based producer of calcined petroleum coke.

Argentina's Banco Macro SA set a size of $150 million for its new seven-year senior notes (B2//B+).

Citigroup and UBS will take the books for the bonds, which will be issued off the company's $700 million global notes program.

Pricing is expected the week of Oct. 29.

The issuer is a Buenos Aires-based retail and commercial bank.

Stable Europe provides supply

In the secondary, emerging Europe traded relatively well to end a weary week, but it was the above-mentioned deals in the primary that stole the show for the Europe and Middle East region.

The sector weakened mildly, but proved defiant in the face of negative headlines regarding U.S. mortgages and a heating pressure cooker on Turkey's boarder with Iraq.

"It's all returning back to us; the old stories are coming up again," a syndicate official said.

Still, "emerging markets are holding in quite nicely," he said.

Not even the risk of regional war has shaken the market in Turkey.

Turkey's issues were called "strong-ish" by the official who has seen the bonds react conversely to what some would normally expect during times of high political volatility.

Friday the president of the Iraqi Kurdish region, Massoud Barzani, said that his government has not provided aid to the Kurdish Workers Party (PKK) fighters, but his people would defend themselves from any actions by the Turkish army.

Turkey still maintains that Tuesday's authorization for an incursion does not guarantee it will follow through, but Iraqi Kurds have repeatedly asked to hold talks with the Ankara government.

Turkey's benchmark sovereigns due 2030 were quoted up at 156.00 bid, 156.50 offered.

Elsewhere in Europe, Russia's sovereigns due 2030 were quoted at 113.103.

LatAm stumbles but doesn't fall

In trading, Latin America is stagnating as best and taking some bruises at worst.

Many issues showed "resiliency" by not dropping lower than they did, according to Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"In general terms you've seen a widening for Latin American and emerging market debt instruments," Alvarez said.

Still the sector has tried with some success to insolate itself from the external chaos.

"Latin America has its eyes closed and is holding its ears," he said.

Venezuela's 9.25% bonds due 2027 were lower by 0.70 to close at 107.30 bid, 108.00 offered while their yield widened 30 bps. Because the bonds have rallied from below par some investors are taking profits, Alvarez said.

The price of oil has helped keep Venezuela afloat, he said. Light sweet crude closed at $88.56 per barrel.

Argentina found its 8.28% sovereign down 1 after a 1.25 gain on Thursday. The issue was seen with a yield 30 bps wider and trading around 93 bid, 94.25 offered.

A trader noted that "in the longer term perspective we are starting to differentiate within emerging markets which issuers have done their jobs and which haven't."

"Mexico and Brazil outshined Venezuela and Argentina," he said.

Brazil's 11% sovereign bonds due 2040 were quoted up 0.15 at 134.55 bid, 134.70 offered.

The government bonds due in 2034 dropped off 0.25 to 128 bid, 128.65 offered and the sovereigns due 2037 were quoted at 114.4 bid, 114.65 offered.

Asian bonds survive blasts

Asian trading was off, but was generally sturdy as the political ground shook beneath it. A day after suicide bomb attacks on returning former prime minister Benazir Bhutto in Karachi, another bomb destroyed a shopping mall in Manila.

Unhurt, Bhutto called the bombings an attack on democracy. The assault was directed at her motorcade and killed approximately 133 people.

"Most of the price action on Pakistan is presently dealer driven, I haven't heard of any real money selling," an emerging markets strategist said.

"Anyone presently in Pakistan [bonds] already has a hard stomach for political volatility and is buying purely on the basis of repayment probabilities."

The Pakistani bonds due 2036 traded 150 bps cheaper than similarly rated sovereigns with like maturity dates, he said.

"Unless it gets downgraded it should not travel much further south," he said.

In the Philippines, the bond market seemed to survive the mall bombing which is believed to have killed eight.

The government bonds due 2030 fell 0.5 to finish at 132.75 bid, 133.25.

Indonesia's sovereigns are enjoying a bump after receiving an upgrade from Moody's Investors Service upgrade to Ba2 from Ba3, a syndicate official said.

The Indonesian government bonds were spotted at 105.5 bid, 106.5 offered.

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