Investor optimism remains despite China, Europe worries; Mumtalakat, Berau Coal eye notes

By Christine Van Dusen

Atlanta, June 22 - Concern about China's move to increase flexibility for the yuan, as well as worries about weaker-than-expected economic data and continued anxiety about the European debt crisis, tainted but didn't destroy emerging market investor optimism that the worst period of volatility has passed.

Yields on 10-year Treasuries declined early Tuesday on the news that U.S. existing home sales fell 2.2% - after forecasts said it would rise 5% - and on anxiety that China's currency reform will reduce its cash reserves and lead to a drop in Treasury buying.

While that inspired investors to eye safe-haven assets, "they're getting more and more comfortable" with emerging market bonds, a New York-based market source said.

"For now we're seeing some stability," an investing source said. "Deals are getting done. Cash is being invested."

Mumtalakat, Berau plan deals

Tuesday's primary market activity remained slow. And just two issuers crossed radar screens.

Bahrain's sovereign wealth fund, Bahrain Mumtalakat Holding Co., talked its planned benchmark-sized issue of five-year notes to yield 5 3/8%, market sources said.

"It's going well," a Zurich-based trader said. "It's gray already, nearly plus 1 point."

And PT Berau Coal Energy, an Indonesian producer and exporter of thermal coal, is planning to issue senior unsecured notes through Berau Capital Resources Pte. Ltd., a market source said. No other details on the offering were available Tuesday.

"It's very quiet today," the New York-based source said. "I would expect supply to pick up tomorrow if we continue to see some stability. We could see some things out of the Latin America space."

Some market watchers believe Brazil may soon reopen its 2021 and 2041 dollar bonds.

But others believe Indonesia's Indosat will come first with an issue of $500 million to $700 million. Others think Ukraine's planned issue of eurobonds will come soon, along with Polskie Gornictwo Naftowe I Gazownictwo (PGNiG)'s planned issue of up to PLN 3 billion in bonds with maturities ranging from one month to one year.

"I would imagine there's going to be at least one EM deal tomorrow," the New York-based source said. "But today it's very quiet, with light liquidity."

The new issue calendar has "kind of opened up, especially in Asia, over the last couple of days," the investing source said. "They've done OK. They're hanging in there."

Trading thin, solid

The tone on Tuesday was "a little softer," he said. "There's been a pretty good push over the last week and a half or so. What we're seeing is sort of just really mirroring the equity markets."

Overall, the market is "pretty stable," he said. "There's not much selling. We're not really seeing outflows or selling. Overall there's been some consolidating for a couple of days. If anything we have buyers at lower levels. But that can change in the blink of an eye."

Though volume remains thin, "we have seen some of the higher-beta trading names and outperformers trading relatively well," the New York-based source said.

He pointed to the $750 million issue of 7½% notes due 2020 from Brazil's Fibria Overseas Finance Ltd., which priced in April at 99.136 to yield 7 5/8%, or Treasuries plus 389 basis points.

"Fibria was as low as 95 about two weeks ago," he said. "Now it's at 103. That's 4 points above reoffer. They've come back big-time. It's a pretty large liquid deal."

Most names "have done really well during the last five to eight days," he said.

The $1.25 billion 5 1/8% notes due 2020 from the Export-Import Bank of Korea that priced Monday at 99.229 to yield Treasuries plus 198 bps "went very well," an informed market source said. "It's a couple basis points wider on light volume, as the market felt a little weaker toward the close yesterday."

Meanwhile Argentina and Venezuela "have had massive runs. They're 5 to 8 points higher," the investing source said. "It's incredible. But then Mexico is 50 basis points tighter from the wide levels of three weeks ago."

Indonesia's benchmark 2020 bond was up "5 points," he said. "People are buying corporate names out there, extending out on the credit curve. These are typical things they do when they get comfortable."

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