Croatia prints notes amid troubles in Japan, Bahrain; Hyva, Localiza Rent a Car on tap

By Christine Van Dusen

Atlanta, March 16 - Risk appetite improved and then retreated on Wednesday as most emerging markets investors and issuers remained focused on the earthquake-related nuclear accident in Japan and the continued turmoil in the Middle East, particularly in Bahrain.

"The market started out in a much better mood," a market source said. "But as the day wore on ... EM lagged."

Volumes remained low as investors only slowly returned to the market. The JPMorgan Emerging Markets Bond Index Plus closed the day wider by 10 basis points at Treasuries plus 284 bps.

"Sentiment remains fragile and vulnerable," according to a report from RBC Capital Markets.

Still, some issuers came out of hiding on Wednesday, with Croatia selling 10-year dollar-denominated notes, Hyva Group BV and Localiza Rent a Car on deck and Vietnamese conglomerate Hoang Anh Gia Lai Group (HAGL) setting out on a roadshow for its own dollar notes.

Croatia prints notes

The $1.5 billion 6 3/8% notes due March 24, 2021 from Croatia came to market at 98.25 to yield 6.617%, or Treasuries plus 340 bps, a market source said.

The notes priced in line with talk, which was set at the Treasuries plus 350 bps area.

Barclays Capital, Deutsche Bank and JPMorgan were the bookrunners for the Rule 144A and Regulation S notes, which are non-callable.

In other deal-related news, Vietnam-based HAGL is marketing a potential issue of notes that could total $200 million and carry a five-year tenor via Credit Suisse.

"It's B rated and not a state-owned company, and they're seeing investors now," a market source said. "It's nothing too ambitious."

Hyva up next

The next deal likely to price in the EM universe is the $375 million notes due 2016 from Netherlands-based hydraulic-cylinder maker Hyva.

The company set price whispers on Wednesday at the high 8% to 9% area, a market source said.

The notes - via Bank of America Merrill Lynch, Goldman Sachs, Nomura and Standard Chartered - are expected to come to market on Thursday.

Proceeds will be used to fund the acquisition of Hyva by Unitas Capital and NWS Holdings from 3i Group plc.

"I'm told the books are two-times covered," a market source said. "I don't really like it. It seems like they're pitching it to high-yield investors, which is why it's coming a little tighter. It's not a bad story but it's mostly a Brazil, India and China story. That's why it needs a better yield. In India and China you don't get any security or guarantees from operating subsidiaries, so when something goes wrong you can't get at the assets. So this isn't quite enough."

Localiza coming soon

Also on Wednesday, market sources were keeping an eye out for the upcoming notes due 2018 from Brazil-based Localiza Rent a Car. The company plans to issue dollar bonds via Bank of America Merrill Lynch, Bradesco BBI, Citigroup and Itau.

Pricing could take place by the end of the week.

"I'm curious to see how Localiza does," a market source said. "They have no foreign assets, so for them there's no reason to do a dollar deal."

The notes are linked to the Brazilian real, he said. "Those kinds of deals mostly come from banks, with a couple of exceptions," he said.

Ukraine underperforms

Looking at the secondary market on Wednesday, names like Ukraine, Russia and Turkey all opened around 7 bps firmer.

But Ukraine went on to become one of the day's underperformers, along with Belarus and Tunisia, which suffered yet another ratings downgrade.

Some dollars were put to work in the morning in liquid paper from Russia and Kazakhstan, another market source said.

"Everyone is just easing back in," he said.

Bahrain sees decent bids

Bahrain was once again making headlines on Wednesday as security forces clamped down on protestors in Pearl Square following the government's announcement of a three-month state of emergency.

"The (Bahrain) stock market has been closed today and there are reports of violence and fatalities," according to a report from RBC Capital Markets. "Fitch last night announced a two-notch downgrade to BBB."

In response, Bahrain's five-year credit default swaps spread traded down at 350 bps on Wednesday morning, the London-based trader said.

"While the news stories and reporting out of Bahrain remain saddening and unpredictable, the market actually had a decent bid for Bahraini paper," he said. "Bahrain investors clearly love a firm hand. A bid has returned to the bonds."

He pointed, in particular, to Bahrain Mumtalakat Holding.

"Perhaps with Mumtalakat yielding a high six handle people are beginning to think one is being paid for the risk," he said.

Some trading in Middle East

Abu Dhabi-based oil investment entity International Petroleum Investment Co.'s bonds were still suffering from indigestion, the London trader said.

"This [was] despite one aggressive buyer mid-morning trying to buy the 2020s and 2021s," he said.

Sukuks experienced decent demand, with buyers seen for Qatar Islamic Bank, the Emirate of Ras Al Khaimah, Islamic Development Bank and Abu Dhabi Islamic Bank.

"All were trading up in the marketplace," he said. "Dubai continues to trade pretty well. The name will benefit from the turmoil in Bahrain and the decrease in tourists to North Africa."

Conversely, issues from Qatar were "feeling a little heavy," he said. "I suspect the real spread tightening on Qatari names will come once the U.S. Treasury market sells off."

Japan in focus

None of this news could do much to distract from the increasingly distressing story out of Japan and its effect on the markets.

The impact on emerging markets is negative, to be sure, but that isn't likely to last long, according to a report from RBC.

"The negative impact on EM from reduced trade and commodity demand is likely to be more or less short-lived, though the capital flows outlook is less certain and could be longer-lasting, potentially reducing a key source of EM capital inflows," the report said.

Though EM economies in Asia have strong trade ties with Japan, their exports are relatively small as a share of their gross domestic product, RBC said.

"Repatriation of Japanese capital from abroad to finance reconstruction could result in reduced investment exposures in EM," RBC said. "When considering both trade and capital flow risks in tandem, Asian economies South Korea, Singapore and Indonesia look most exposed to a potentially worse-than-expected Japan situation unfolding."

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