Brazil's CVRD prices $1 billion; corporate calendar builds; funds see $111.5 million inflows

By Paul A. Harris

St. Louis, Jan. 5 - Emerging markets opened softer on Thursday following Wednesday's sovereign bond bash, which saw the Philippines and Turkey price a total of $3.6 billion of new issuance.

Those new bonds continued to trade above their issue prices but eased from their highs.

"EM opened a bit softer in spread this morning," said a trader who focuses on Asian credits.

"There hasn't been much follow through," the source added, speaking at Thursday's close. "There has not been much flow today."

Consistent with color from an investor who spoke to Prospect News on Wednesday, the trader noted that the buy-side is lately complaining about "valuations and levels."

"At the same time there just seems to be a lot of cash either sitting on the sidelines or steadily going into the market, which is keeping it very well bid," the trader asserted.

"You have to think that pullbacks will be pounced upon very quickly given all the cash that is sitting on the sidelines."

$111 million of fuel for the fire

In a late Thursday email message Brad Durham, managing director of Emerging Portfolio Fund Research for EmergingPortfolio.com, reported that the dedicated emerging markets bond funds saw $111.5 million of net inflows in the week to Wednesday.

Durham commented that the flows regained some strength after several weeks of subdued flows or net outflows.

"I think the Fed minutes indicating that the end of tightening is near will give a shot in the arm to EM bond fund flows that have slowed in recent weeks due to supply concerns," Durham commented.

"With US Treasury yields down investor risk appetite for EM bonds is strengthened."

CVRD tight to talk

Thursday's session saw terms emerge on a $1 billion issue of 6¼% 10-year notes (Baa3/BBB) from Vale Overseas Ltd., a subsidiary of Brazilian mining firm CVRD.

The company priced the bonds at 99.97 to yield 6.254%, a 190 basis points spread to U.S. Treasuries, at the tight end of the 195 basis points area guidance.

JP Morgan ran the books.

Corporate calendar builds

As forecast, the forward calendar of corporate deals took on a little heft as three prospective issuers announced intentions to market deals via investor roadshows.

Two of the three are Asian names.

Excelcomindo Finance Company BV, a wholly owned subsidiary of Indonesian telecommunications company PT Excelcomindo Pratama Tbk, will start a roadshow on Monday for a dollar-denominated offering of global bonds.

The size of the deal and the structure and tenor of the notes remain to be determined.

CIMB, JP Morgan and UBS Investment Bank are joint bookrunners.

Elsewhere JGSH Philippines, a wholly-owned off-shore subsidiary of conglomerate JG Summit Holdings, Inc., will also start an investor roadshow on Monday in Asia for its $200 million offering of seven-year putable fixed-rate notes, via Credit Suisse First Boston.

Meanwhile from Latin America, Banco do Brasil SA (Grand Cayman Branch) will begin its roadshow Monday for a $300 million offering of perpetual notes (expected Ba1) via Citigroup and BB Securities Ltd.

Philippines, Turkey off the highs

In the secondary market, meanwhile, the new issues from the Philippines held their ground above their respective issue prices, but came off of their highest prices.

To recap, the Philippines priced $2.10 billion on Wednesday in two tranches (B1/BB-/BB): a $1.5 billion issue of 7¾% 25-year bonds at 98.641 to yield 7 7/8%, and a €500 million issue of 6¼% 10-year notes at 99.112 to yield 6 3/8%.

Also on Wednesday Turkey priced $1.5 billion of 6 7/8% 30-year global bonds (Ba3/BB-/BB) at 96.89 to yield 7 1/8%.

Order books for both issuers were said to top out around $6 billion apiece.

On Thursday the trader who focuses on Asian credits said that the Philippines' new dollar-denominated 7¾% bond due 2031 was still trading above its 98.641 issue price, but had steadily drifted off during the course of the day, from a high in Asia of 100.125 bid, to a low of 99.25 bid at the New York close.

"Flows have been fairly light," the trader commented.

"It's more a function of the tone of the market, which has been consolidative."

However the trader maintained that from an issuer perspective the timing of the Philippines deal was "absolutely superb.

"Their timing has not always been that great," the trader maintained.

"This one caught the market when the market was really hungry for Philippines paper.

"They were quick. They executed it well. And they've got themselves a pretty good level."

The trader also confirmed what Prospect News has heard from other market sources: that the Philippines paper benefited from the fact that a lot of accounts had been underweight the credit.

Meanwhile an emerging markets analyst said that the new Turkey 6 7/8% due 2036 saw a moderate widening of approximately five basis points.

"The Turkey deal sold off a bit on the usual flippers," the analyst commented, adding that the widening should be relatively contained given the fact that there was a large order book for the deal and that it offers a much lower price than any other Turkey issue of similar duration.

When Prospect News ran color from an investor, maintaining that Turkey and Philippines were rich deals, past this analyst, the source was loathe to disagree.

"Yes, EM definitely seems frothy at these spreads," the analyst conceded.

"For the Philippines to be doing so well even with all its political problems and its slumping export sector is evidence that the market is simply desperate for paper regardless of the fundamentals.

"But this could continue for a little while longer - there's still plenty of liquidity in the system, and investors are still nervous about LBO risk and other risks in the U.S. high-yield and high-grade corporates markets."

Elsewhere Thursday another broad measure of market sentiment, Brazil's 11% bond due in 2040, eased to 129.75 bid from 130.25 bid at Wednesday's close.

The pipeline

The trader who specializes in Asian names took a look out along the pipeline of potential new deals.

One name that has popped up during several conversations this week was Indonesia. The trader said that Indonesia could easily do $1 billion, and added that the rumor mill had JP Morgan, Deutsche Bank and UBS as the likely dealrunners.

Turning to corporates, the trader also said that during the run-up to Christmas Indian mining concern Vedanta Resources plc was heard to be coming with a deal that is expected to be led by Deutsche Bank and Morgan Stanley.

The trader added that Asian credit market is increasingly focusing on the sub-investment grade-side of things "in a search for any spread at all.

"The deals that are being announced are coming with a high-yield focus," the source added. "That's where people are concentrating."

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