Embraer does deal; Turkish election takes toll on bonds; Greece, Ukraine add to volatility

By Christine Van Dusen

Atlanta, June 8 – Brazil’s Embraer SA sold notes and bonds from Turkey suffered on a volatile but mostly quiet Monday morning for emerging markets assets.

Turkey’s notes took a hit after unofficial results from the country’s election showed that the AK party lost its majority for the first time in more than a decade.

“Market reaction will be negative in the short term, even though recently it had been pricing in a higher probability of a coalition,” according to a report from Barclays. “This raises the possibility of further underperformance in the [Turkish lira] and local rates.”

Against this backdrop, some industry experts are suggesting that investors show caution when it comes Turkey’s bonds.

“We recommend that investors who hold Turkish eurobonds take profits, and that others stay away from the market and observe how the situation develops,” according to a report from Schildershoven Finance BV.

Contributing to Monday morning’s volatility was the ongoing turmoil in Greece and news from Ukraine.

“A group of creditors has expressed disappointment that no basis had yet been found for detailed negotiations with Kiev on how to restructure its debt,” Schildershoven said. “Both sides accuse each other of a lack of engagement in talks.”

Also on Monday morning, volatility in U.S. Treasury rates continued, causing sovereign bonds from Asia to tread water until the start of the European session, a London-based trader said.

Then, when London opened, the market saw “Indonesia paper get crushed with offshore sellers,” he said. “The long end is down 1¾ points, the belly is down 1 1/8 points and the five-year is down ½ point.”

Some Philippines bonds fare better

Bonds from the Philippines fared a bit better, with local support but light flows, a trader said.

“The 2034s and 2037s have underperformed, down one point,” he said. “Liquidity here is as bad as we’ve seen over recent weeks. It feels like customers and dealers alike have de-risked a little now and are waiting for re-entry levels, but holding off on pulling the trigger while rates remain so volatile.”

On the new deal front, Korea Hydro & Nuclear Power (KHNP) was believed to be considering a dollar-denominated issue of notes.

Middle East in focus

Looking to the Middle East, trading was thin on Monday, a London-based trader said.

“U.S. Treasuries rallied today, which typically equates to wider spreads, and today was no exception,” he said.

Bonds from Bahrain steepened on Monday, with the 2018s and 2020s holding in better than the 2022s, 2023s and 2044s, he said.

“Liquidity was poor, for the most part, and surely is only going to get worse into Ramadan, expected in about 10 to 14 days time,” he said.

In other news from the region, market sources were whispering about a possible issue of notes from Dubai’s Drake & Scull International PJSC.

Low volumes for Lat-Am

From Latin America, low-beta spreads were mostly unchanged on a low-volume Monday, a New York-based trader said.

Five-year credit default swaps spreads for Brazil were slightly tighter, moving to 248 basis points from Friday’s 250 bps, while Mexico’s moved 1 bp wider to 131 bps.

Bond prices “bounced around” during the session, with Venezuela and PDVSA paper weakening substantially and Argentina’s bonds remaining mostly unchanged.

Embraer sells bonds

In its new deal, Brazil’s Embraer – through Embraer Netherlands Finance BV – priced an upsized $1 billion issue of 5.05% notes due in 2025 at 99.682 to yield Treasuries plus 270 bps, a market source said.

The notes, which were originally expected to total $500 million to $750 million, were talked at a spread in the 300-bps area before guidance was narrowed to the 275-bps area.

Citigroup and Morgan Stanley were the bookrunners for the Securities and Exchange Commission-registered deal.

The proceeds will be used for general corporate purposes.

Embraer is an aircraft manufacturer based in Sao Jose dos Campos, Brazil.

Aleesia Forni contributed to this article.

© 2015 Prospect News.
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