China South City sells notes as investors shun risk; bond inflows below norm; Greece eyed

By Christine Van Dusen

Atlanta, Jan. 7 - China South City Holdings brought a new deal - and Korea's Woori Bank and the Philippines' Energy Development Corp. planned offerings - on a Friday that saw investors sticking to the sidelines amid continued concerns about the European economic crisis.

Not even a reduction in the unemployment rate in the United States could help nudge volumes higher, given that the news was tempered by a lower-than-expected number of jobs added to payrolls in December.

"In general, across the board, there is a bit of paring in risk," a Toronto-based market source said.

Most spreads widened on the release of the U.S. jobs report, with most of Latin America up by about 5 bps. Argentina stood out as usual, widening by 15 bps, and Venezuela was up by 10 bps.

"Anecdotal evidence suggests that liquidity in the credit markets is somewhat thin," wrote Gavan Nolan, credit analyst with Markit, in a report. "Some investors may be deciding to sit out the volatility at this early stage in the year, and dealers are reluctant to take on positions going into the weekend."

Asia in focus

The new deal from logistics and shipping company China South International Industrial Materials City Co. Ltd. (China South City Holdings) - $250 million 13½% notes due Jan. 14, 2016 - came to market Friday at 97.381 to yield 14¼%, a market source said.

UBS and BOC International were the bookrunners for the Rule 144A and Regulation S deal, which was talked to yield 14¼%.

Proceeds will be used for general corporate purposes and to fund properties under development and planned for future development.

Also from Asia, Korea's Woori Bank is planning to issue as much as RMB 15 billion of notes in three tranches later this month, a market source said.

The company is expected to issue one-year notes at a yield of 1.2% to 2.2%, 18-month notes at a yield of 1.3% to 2.3% and two-year notes at a yield of 1.45% to 2.45%, the source said.

And Philippines-based power generation and distribution company Energy Development mandated Deutsche Bank and JPMorgan for an issue of $300 million notes, according to a company announcement.

Proceeds will be used for general corporate purposes, for funding growth projects and for capital expenditures and debt servicing requirements.

Inflows tick up

Net inflows into emerging markets bond funds totaled $385 million for the week ended Jan. 5, up just slightly from the previous week's $356 million, according to data tracker EPFR Global.

"Both are well off the roughly $1.2 billion weekly average for this fund group in 2011," said Cameron Brandt, senior analyst with EPFR. "Why? The yields on better-quality EM are getting less attractive and, largely due to tire-kicking of peripheral euro zone issuers, the whole asset class seems to be getting some closer scrutiny these days."

And Wednesday's E.U. - suggesting that senior bondholders should help pay for financial industry bailouts - didn't help to inspire confidence in the euro zone.

Though haircuts under the proposal are seen as a last resort, the move could push up the cost of senior bonds and create an incentive to issue more covered bonds, Nolan said in his report.

In response, the Markit iTraxx Senior Financials index on Wednesday pushed toward the 200 bps level for the first time since June 2010. On Friday the index breached that level, touching 220 bps by the European close.

"Investors adjusted to the new reality that senior debt is no longer sacrosanct," he said. "The turmoil in the bank credit market had a knock-out effect on sovereign spreads."

Also driving spreads wider, he said, were plans by Spain, Portugal and Italy to tap the capital markets next week.

Euro zone worries continue

U.S. payroll figures for December fell short of expectations, with about 103,000 jobs added during the month. But at the same time, the unemployment rate dropped to 9.4% from 9.8%.

"The payrolls were somewhat disappointing, and we've seen some negative spillover for external debt," the Toronto-based source said.

Compounding the problem were the continued troubles faced by nations in the euro zone, including Greece, which saw its credit default swaps rise close to an intraday record on Friday.

The sovereign was considered to be the most risky in the fourth quarter of 2010, according to the latest CMA Global Sovereign Debt Credit Risk Report. Venezuela ranked second, followed by Ireland, Portugal, Argentina, Ukraine, Spain, Dubai, Hungary and Iraq.

Among the 10 least risky sovereigns, Hong Kong ranked sixth, just below the United States, and four slots ahead of No. 10 Saudi Arabia.

Argentina saw the best quarterly change, with its credit default swaps tightening 19.6% in the quarter. Latvia tightened 19% and Romania tightened 17% while Hungary widened 18%.

Of the sovereigns listed as having the worst quarterly performances, all were in Western Europe and none were considered to be emerging markets.

"Emerging Europe had another good quarter," the report said. "Liquidity in emerging Europe is also improving."

EM sovereign spreads improved

Abu Dhabi ended the fourth quarter strongly, the report said, while Qatar's CDS tightened 9 bps, perhaps on the news that the sovereign would host the World Cup in 2018.

In Asia, Vietnam was the worst performing in the fourth quarter, widening 23.5 bps as Moody's Investors Service cut the sovereign's rating to a single B in December, following Fitch Ratings.

"Indonesia spreads continued their run from the third quarter, to improve another 12 bps," the CMA report said. "It is also the best annual tightener in Asia."

The Philippines also ended the year on a strong note, the report said. And India tightened 13% in the fourth quarter. "However, year on year the cost of protection widened to 160 bps from 118 bps."

The stronger credits in Latin America trended out in November before trending back in quickly at the beginning of December, the report said. Venezuela's curve steepened slightly in the quarter.

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