Emerging markets on even keel; Croatian Bank for Reconstruction and Development pulls deal

By Aaron Hochman-Zimmerman

New York, Aug. 19 - Emerging market credit followed the path of schizophrenic U.S. equities and ended nearly flat on Wednesday.

Trends were difficult to peg as volumes slowed, prompting one market strategist to say "it feels like a typical August."

The Croatian Bank for Reconstruction and Development pulled what many considered a poorly timed attempt at issuing €150 million, but the primary was otherwise silent.

Brazil may lead investors back to the primary market in September, a strategist said, although "if the market goes south again, I don't think they [investors] will come in."

The market's future is still in doubt as September draws closer.

Many people think "valuations just got ahead of themselves," he said, although nearly $1.1 trillion on the sidelines is a "very positive technical factor."

Anecdotally, investors may be spooked in September by the one-year anniversary ghosts of Lehman Brothers, but the market has defied the pessimists for some time.

"I wouldn't be half surprised if there is an anniversary hiccup," he said.

In the meantime, the new bonds of Petroleum Co. of Trinidad and Tobago continued their strong performance and were quoted at a spread of Treasuries plus 583 basis points.

Also, from the major markets, volatility added on just 0.08 to close at 26.26, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets stretched wider by 5 bps to a spread of 380 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 5 bps with a spread of 394 bps.

The diversified index has a less strict liquidity rule for inclusion.

Croatia Bank for Reconstruction pulled

Croatian Bank for Reconstruction and Development pulled a €150 million reopening of its 7¼% senior unsecured bonds (A3/BBB/) due 2012.

No updated timetable has been released for the offering, although the bank may reattempt the issue under more favorable market conditions.

The Croatian Bank for Reconstruction and Development is a Zagreb, Croatia-based development lender.

Prospects for the deal were looking grim after the deal was "open such a long time," a trader said.

A previous attempt by the bank found a similar fate.

"It had to pull back last time; it didn't have enough subscription," he said.

The problem is as much the name as the timing, he said.

"Had it come out a month before, they wouldn't have problems," he said.

"This is the worst time to try to place an issue," a strategist added.

Slow emerging Europe unchanged

Emerging Europe remained at stagnant levels while volume was "more than 50% less, compared to two weeks ago," a trader said.

Many investors found sufficient yields in the investment-grade market and have favored the developed nations' credits over the emerging markets, he said.

Some credits were able to creep higher, including the bonds from Russia's OAO Severstal.

The bonds due 2014 were quoted at 92¾ bid, 93½ offered, while the bonds due 2013 were quoted at 95¼ bid, 95¾ offered.

Meanwhile, Russia's sovereign bonds due 2030 were quoted higher by just 1/8 point to 100¾ bid, 101 offered.

Also in the category, Turkey's government bonds due 2030 were seen unchanged at 154 bid, 154¾ offered.

Ukraine's bonds due 2016 continued to hold their strength at 80 bid, 81 offered.

Petrotrin leads LatAm corps

Latin American trading dragged in volume while levels turned in a balanced performance.

"It's all slowed down," a trader said.

"All the new issues which have come out, they stay at the same price," he said.

Mexico's "Petrotemex, everybody wants to sell," he said, but no one is buying.

"People are a bit upset," he said after investors adjusted to the idea that "they could be losing money too."

Meanwhile, Petrotrin has "done quite well for itself," a strategist said.

The investment-grade credit "priced very attractively" and "in line with a BB- credit," he said.

The 9¾% bonds due 2019 priced on Aug. 11 at 99.217 with a spread of Treasuries plus 618.4 bps.

The bonds were quoted at 105 1/8 bid, 106 offered and a spread of Treasuries plus 583 bps.

"I think there's more upside ahead," the strategist said.

Calmer sovereigns

The Latin American sovereigns continued to trade slowly and laterally amid the August quiet, which still held sway.

The high-betas were nearly unchanged.

Argentina's 8.28% discount bonds due 2033 gave up ¼ point to 60¼ bid, 61½ offered, while Venezuela's 9¼% sovereign bonds due 2027 crept up just 0.1 point to 71.85 bid, 72¾ offered.

In Brazil, the 11% government bonds due 2040 slipped ¼ point to 131½ bid, 131.6 offered.

Meanwhile, U.S. secretary of state Hilary Clinton attempted to calm fears in the region over the expanding U.S. military presence in Colombia.

Clinton stated the United States only intends to use the bases in limited counter-narcotics and counter-terror roles.

"This is about the bilateral co-operation between the United States and Colombia regarding security matters within Colombia," she said at a press conference following a meeting with Colombia foreign minister Jaime Bermudez.

Asia holds tight

Asian equity markets struggled on Wednesday, but credit seemed generally unharmed, although the often outperforming sector was held to its moorings.

China's Swire Pacific Ltd., which priced its 5½% bonds at 99.529 on Aug. 12, was seen trading better by just ¼ point at 101 1/8 bid, 101.45 offered.

Malaysia's Petroliam Nasional Bhd. initially disappointed but is now holding in line with the rest of the market. The conventional bonds due 2019 were seen close to their pricing level at 99¼ bid, 99½ offered.

On the sovereign side, Indonesia performed well.

The Indonesian sovereigns due 2019 were quoted at 132¾ bid, 133¼ offered.

Also in Asia, China's oil giant PetroChina struck a nearly $50 billion deal with the Australian government to develop 2.25 million tons of liquefied natural gas in the Gorgon oil field off of the Australian coast.

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