Emerging market debt hit hard by new supply, GM rumors; inflows at $93.4 million

By Reshmi Basu and Paul A. Harris

New York, April 14 - Emerging market debt was dismantled Thursday on a supply glut from issuer's such as Indonesia. Also, negative news from the investment-grade bond world bruised the asset class.

Meanwhile in the primary market, CJSC Kyivstar GSM sold an upsized offering of $175 million of seven-year bonds (B1/B+) at par to yield 7¾% via Citigroup and Dresdner Kleinwort Wasserstein.

But the Republic of Uruguay postponed an offering of $300 million of 12-year bonds (B3/B) due to market conditions, said sources.

In other news, Russia's Gazprom is seeking $900 million in a syndicated loan in coming weeks, according to banking sources.

Too much supply

Emerging market debt is smarting from the issuance of more than $2 billion of new paper over the last two days. On Wednesday, Grupo Transportación Ferroviaria Mexicana priced a $460 million issue of seven-year senior notes (B2/B+) at par to yield 9 3/8%.

Morgan Stanley ran the books for the Rule 144A with registration rights notes. Scotia Capital was the co-manager.

Also, Celulosa Arauco y Constitucion SA priced an upsized $400 million of 10-year bonds (Baa2/BBB+/BBB+) at 99.525 at a spread of Treasuries plus 132 basis points.

JP Morgan was the sole bookrunner for the Rule 144A/Regulation S (with registration rights) offering.

However, the big sting, sources said, came from the Republic of Indonesia, which priced $1 billion of 10-year bonds (B2/B+/BB-) at 99.127 to yield 7 3/8% via Citigroup, Deutsche Bank and UBS AG.

Indonesia deal provokes complaints

Several market sources had negative comments on Indonesia's deal, noting it traded sharply lower in the after-market.

"It's pretty awful," said a trader.

"The deal is closing 95.626 bid. That's 3½ dollar points below where it was priced on Wednesday. And the 10-year Treasury is up seven ticks on the day," he said.

"It's the worst deal that I have ever seen. A lot of guys that have been on the desk for close to a decade are saying that they have never seen a deal like this in Asia."

That view was shared by a market source, who said that the Indonesian deal "did not leave a very good taste in investors' mouths - probably the worst transaction of the year by far."

The market source said that even a major European money manager had sent a message calling the "New Indonesia deal a disgrace. The only good news is that I didn't buy any Noble Group."

The source said that many had up until this week considered the Noble Group transaction as the worst of the year.

"They priced the [Indonesia] deal too tight for the size of the deal," remarked the trader.

"We heard that in order to get the second $500 million done that they placed it in some very weak hands."

The new sovereign attracted an order book of $2.2 billion with 207 accounts playing, according to another source.

Local demand made up slightly more than half of the total demand, with 10% from Hong Kong, 13% from Singapore and 30% from Indonesia. Meanwhile, 18% was allocated to the United States and 20% to Europe.

Another source said that the Asian market was anticipating that the new bonds would be weaker and so was waiting to jump on it in the secondary market. And fall they did.

"And there has been incessant hedge fund shorting of the deal today [Thursday]," remarked the trader.

"We have not seen any kind of capitulation selling from any of the weak hands, which suggests that this thing could continue to gap down; I'm talking three to five points lower once the capitulation selling kicks in.

"And it won't take very much more from here: guys that have already lost 3½ points on an outright basis - and some of them will have hedged it and are going to lose another quarter of a point there...It's ugly. It's screwing up the whole market," he commented.

"It's dragging everything lower. People are looking at that deal as a litmus test as to the health of the Asian market. And they don't like what they see.

"The patient is somewhere between delusional and dead," remarked the trader.

However, the new Indonesian issue is not necessarily what is driving the market lower, said the market source.

"But a[n] ... underperforming transaction like that adds fuel to the fire," he said.

U.S. corporate news pressures EM

The market source added that particular events in the U.S. investment-grade corporate bond market aided in pushing down emerging market debt.

"A very unfounded and very unlikely rumor started over in Europe that GM was filing for Chapter 11 - which is entirely false, but it still floats around the market and people get anxious," he said.

Another cause for consternation came from oil and gas player Kerr-McGee Corp. when it announced its intentions to buy back $4 billion of common stock, he remarked.

That prompted all three rating agencies to cut the company to junk, Moody's Investors Service lowering its senior unsecured notes to Ba3 from Baa3, Standard & Poor's cutting its corporate credit to BB+ from BBB- and Fitch Ratings cutting its senior unsecured debt to B from BBB.

Fitch said that the buyback plan would increase Kerr-McGee's debt to $7.2 billion from $3.2 billion.

"The fact that they have taken themselves private effectively and doing a leveraged buyout - it's how it appears on the outside, that sort of single credit risk and single credit event just sends a lot of shivers through the market on top of all the bad news we've had with the autos," commented the market source.

"That has an effect on general investor apathy and that's spilled over into emerging markets in a pretty big way," he commented.

In trading, emerging market debt plummeted. The Brazil C bond was down 1¼ to 98½ bid while the bond due 2040 slid 2.65 to 111.50 bid. The Ecuador bond due 2030 lost 2¼ to 87 bid. The Mexico bond due 2009 was down one point to 117½ bid. The Russia bond due 2030 fell 1 3/8 to 103 7/8 bid. The Venezuela bond due 2027 lost 1.35 to 98 bid.

All of the new paper and rumors of more to come hurt the market, said a buyside source.

Among them is talk that Ecuador will hit the market.

"I think finally all the issuance we have over the past few weeks started to make people feel uncomfortable," the source said.

And the "ridiculous" GM rumor "pushed us down the cliff."

As high yield plummets and becomes cheaper, the question is whether investors will abandon emerging markets for the asset class. According to the buyside source, the two are different stories - and emerging markets reads better.

"I honestly believe that the cycle in emerging markets is a lot more positive on fundamentals. And it's more of a structural change that is here to stay as opposed to high yield where at some point you are going to see these corporates pick up," the source said.

"I don't believe it is such a good fundamental story. Yeah, it might be cheap on a technical basis. That relationship is always going up and down depending on a market basis.

"I think if you want to play on fundamentals, EM is a better bet," she said.

"If at the end of the day, something does happen to GM, I think all the markets will be affected. And it will be hard to quantify the sell-off in EM versus high yield."

Fund inflows at $93.4 million

Emerging market funds saw their second week of cash coming in. Emerging market bond funds had inflows of $93.4 million in the week ending April 13, according to EmergingPortfolio.com Fund Research.

This is the second straight week of inflows, which leaves inflows year to date at $2.67 billion. Last week, emerging markets attracted $71.5 million of cash, ending a two-week slide.

Global bond funds had inflows of $335 million in the week. These funds have had $5.62 billion of inflows year-to-date.

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