"Everything gets hit;" Indonesia, Dacom back away from deals, traders warn of credit cycle shift

By Paul A. Harris

St. Louis, March 23 - The sell-off in emerging markets kindled by inflation fears continued unabated on Wednesday, as players were said to be checking out early for the long Easter weekend.

Bonds were down across the board, traders said, although several were seen to get a slight lift off their session lows.

Meanwhile in the primary market, Asian issuers that earlier in the week had been expected to brave the gale reefed their sails on Wednesday.

Indonesia decided not to weigh anchor with its $1 billion sovereign deal. And Korean telecommunications company Dacom Corp. decided to wait until at least next week to do so.

Everything is getting hit

One trader who focuses on higher yielding Asian paper was in no mood to draw distinctions when contacted Wednesday by Prospect News.

"Everything is getting hit," said the trader who added that at mid-day he saw the Philippines sovereign bonds off 1.5 points from their opening levels and about six points lower in the last five trading days.

"The price action this week is predicated upon a very thin market," said the trader. "A lot of people are on spring break, with the holiday. And in periods of thin markets you get outsized moves, like we have seen, because it's easy to push stuff around.

"And a lot of people are looking at last spring's meltdown, where the worries were similar: inflation, compressed valuations, soaring oil prices...

"There are about 20 things to be negative about. But the most important one is that the credit cycle has turned in both high grade and high yield."

"A self-fulfilling prophecy"

The trader went on to contend that the present retreat from emerging markets comes with an atmosphere of deja vu.

"A lot of people have tried to front-run what they expect to be a recurrence of last year's meltdown," the trader said. "And it has become a self-fulfilling prophecy.

"This time we have seen everyone try to lose bonds before the second quarter, and before rates went up, and before it was too late. And there aren't any bids. There haven't been enough bids to support all of the selling. That is why the market has gotten hit."

Shift to risk avoidance

The rumor, later confirmed by market sources, that Indonesia will temporarily postpone its anticipated $1 billion global bond offering, which was heard talked on Tuesday at 180 to 190 basis points, failed to surprise the trader.

Nor was the source surprised that South Korean telecommunications and internet service provider Dacom will hold off until at least next week before it prices its $300 million five-year bullet (Ba3/BB-), even though the company and its bookrunner, Credit Suisse First Boston, wrapped up the roadshow on Monday.

"I would be shocked if either of those deals came," said the trader. "The market right now is not supportive of any Asian high-yield names, especially ones that have been trading rich for technical reasons.

"Indonesia has been trading technically rich because there is no high-yield paper outside of the Philippines in the sovereign space that institutional investors can really get their teeth into. So they bid up the valuation of Indonesia way beyond where a single-B credit should be valued.

"Now things don't look as great. And people are more focused on risk avoidance than they are on diversification.

"So nobody is willing to pony up and pay the rich valuation where they had been talking that $1 billion Indonesian 10-year piece of paper.

"There has been a sea change in the mindset of the market. It's no longer about diversification; it's about risk avoidance. So nobody cares if Indonesia paper is all of the sudden cheaper, when the whole backdrop is melting down."

The "sell" attitude

Meanwhile a trader who focuses on Latin American paper had a similar story to tell later in the session.

"The market opened with a negative tone on both the fixed-income and equity sides," this trader said.

"Mexico and Brazil got hit pretty hard during the day.

"There was a minor improvement during the day, but still pressure on the market is on the down side."

The source spotted the Brazil global bond due 2040 closing at 109.60 bid, 109.75 offered, and the new Brazil 2015 closed between 93 and 94, both lower on the day. The Brazil C bond closed at 98.25 bid, 98.50 offered, also lower.

Earlier a market source spotted the Brazil C bond at 98.50 bid, 101.38 offered, down 2.84 on the day, and the 2040 at 109.50 bid, 110.38 offered, 0.79 lower on the day.

The Venezuela global bonds due 2018 traded late at 129.50 bid 130.688 offered, having sunk to 128.50 bid 129.50 offered earlier in the session. However the bonds were still well off from Tuesday's closing levels of 132.50 bid, 133.75 offered.

The Venezuela bonds due 2027 were at 98.15 bid, par offered, also up from earlier levels of 97.70 bid, 99.55 offered earlier Wednesday, but down from 100.25 bid, 101.10 offered at Tuesday's close.

Another source had the Venezuela 2027 paper 1.687 points lower on the day at 98.688 bid, 99.688 offered.

Elsewhere Ecuador's global bond due 2012 was seen at 100.25 bid, 100.50 offered, slightly better than 99.875 bid, 100.50 offered earlier in the session, but still down 0.25 on the day. Meanwhile the longer paper, the Ecuador bond due 2030, was off 2.24 on the day at 89.94 bid, 92.0 offered, despite regaining some ground during the day.

The Fed and General Motors

Asked to diagnose the present predicament of the Latin American credits, the trader told Prospect News that the causes of the malady are now very well known indeed.

"After Tuesday's report by the Fed, the market understands that the interest rate is going to keep going higher," said the trader. "That is going to have a negative effect on emerging markets.

"Add to that the situation with General Motors, and the excess liquidity in the high-yield market, and you have a situation where emerging markets might not be favorable.

"You are maybe going to see some institutional non-dedicated investors go into high-yield."

Russia holds

Finally on Wednesday, a market source said that the Russian dollar-denominated bond due 2030 held its own during the session at par bid, 101.25 offered, after having dropped to that level from 102.75 bid on Tuesday.

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