Lower commodities, equities leave Asia mixed, Lat-Am wider; Peru to issue dollar bonds

By Christine Van Dusen

Atlanta, Aug. 18 – Cash prices for Latin American bonds bounced around on Tuesday, while Malaysia firmed up and Korea was broadly unchanged against a backdrop of lower commodities, lower rates, weaker currencies, a stronger dollar and lower Asian equities.

“It’s a continuation of trends,” a London-based trader said. “Most market commentators are not willing to pick a bottom on oil, as they fail to see a positive story on the demand or supply side.”

Against this backdrop, Peru sold new notes.

“Peru underperforms today, as the new dollar 12-year issue pressures the rest of the curve,” a trader said.

Asian bonds started off a bit firmer but took a hit as Chinese equities continued to fall, another trader said.

“Investment-grade cash bonds closed the day unchanged,” he said. “Lower oil had very little impact on oil names, with Cnooc Ltd.’s 2025 trading up at 180 basis points, tighter by 2 bps.”

Bonds from Malaysia firmed up while Korea’s were broadly unchanged.

“Thailand spreads remained firm after the bombing in Bangkok,” he said.

Going into the London close, the tone for Asian bonds was mixed, with Indonesia and Pakistan trading within a narrow range, another trader said.

“China investment grade was probably 1 bp to 3 bps wider,” he said. “The Bangkok bombing incident didn’t really impact the market.”

Property company bonds were “a touch softer,” he said.

From Latin America, low-beta spreads finished the day wider, with Brazil’s five-year credit default swaps spreads closing at 312 bps from 306 bps. Mexico’s ended the session at 142 bps from 138 bps.

Peru prices notes

In its new deal, Peru priced $1.25 billion 4 1/8% notes due Aug. 25, 2027 at 99.766 to yield 4.15%, or Treasuries plus 195 bps, according to a filing from the sovereign.

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

The proceeds will be put toward pre-funding 2016 requirements.

Venezuela under pressure

In other news from Latin America, Venezuela and PDVSA continue to face the possibility of a default on their debt, according to a report from Barclays Capital.

“We remain of the opinion that Venezuela/PDVSA has more of a liquidity than a solvency problem,” the report said. “However, the inaction of the authorities and the possibility of no recovery in oil prices or a failure to access financing are keeping the probability of default high.”

In response, five-year credit default swaps spreads for Venezuela have hit their highest level in about eight years, a market source said.

If there is a default, the two parties are likely to default together.

“Trying to assess the timing of a credit event is particularly challenging,” the report said. “Nonetheless, considering the financing that has been already secured and given the available assets, we think that the probability that this happens before first-quarter 2016 is relatively low.”

If oil prices recover and China increases its exposure, “Venezuela should be able to sort out the short-term liquidity problems,” the report said.

But if oil prices stay low, Venezuela and PDVSA will likely need to restructure, the report said.

In trading, Venezuela and PDVSA were mostly unchanged, a New York-based trader said.

“The front end continues to outperform,” he said.

Turkey’s talks collapse

Looking to Turkey, the sovereign curve got a lift in the morning but soon dipped after government coalition-building talks collapsed and the country moved closer to holding repeat elections.

“Bonds were left offered,” a trader said.

Meanwhile, notes from Latin America were “very quiet again,” a New York-based trader said.

Some market-watchers were keeping an eye on Russia-based VimpelCom Holdings BV, which is looking to sell telecommunications towers in Russia, a move that “should improve its credit quality” and “may positively affect its eurobonds,” according to a report from Schildershoven Finance BV.

The company is looking to sell about 15,000 towers for about $1.5 billion.

Burgan to redeem bond

From the Middle East, Kuwait-based Burgan Bank SAK received regulatory approval to redeem a $400 million bond that is due in September 2020, a trader said.

“Obviously a slew of sellers on the back of this news,” he said.

The bond went from about 113 bps mid in the morning to being offered at sub-110 bps as the day went on, he said.

“If for some reason they could call the bond back at par as a result of this regulatory event, there would be some serious goodwill lost with the investor community,” he said. “And while not entirely clear in the prospectus at what level the bond can be redeemed, it seems apparent this event was well-flagged in the document.”

Middle East curves steepen

Other bonds from the Middle East were “soggy,” the trader said.

“Curves continue to steepen, with limited demand,” he said. “Liquidity remains poor.”

Five-year credit default swaps spreads for Qatar traded at 60 bps while Abu Dhabi’s moved to 56 bps.

“Always a warning light that some macro or larger trades are going through the market,” he said. “Small bounce on oil into the close.”

Bonds from Dubai continued to trade “fairly well, all things considering,” he said. “However, the way the market is going, ultimately even the safer-haven names and bonds will get picked off one by one when investors realize there are no meaningful bids on the ones they want to sell.”

Ukraine in focus

Ukraine’s sovereign bonds have been better bid so far this week, said Fyodor Bagnenko, a fixed-income trader with Dragon Capital.

“This Wednesday marks exactly five weeks before Ukraine’s next sovereign eurobond maturity of $500 million on Sep. 23 – the time frame the government would need to complete necessary restructuring-related legal steps,” he said. “That said, the sovereign stays very illiquid but generally better bid, with most prices closing unchanged or slightly better.”

Quasi-sovereigns and corporates from Ukraine have seen some two-way interest, he said, but very little trading has taken place.

Kexim does deal

In other news, Korea Export-Import Bank on Monday sold $125 million floating-rate notes due Feb. 8, 2017 at par to yield Libor plus 285 bps, a market source said.

Goldman Sachs was the sole bookrunner for the Securities and Exchange Commission-registered deal.

The proceeds will be used for general operations, including extending foreign currency loans and for the repayment of debt.

Kexim is a lender based in Seoul, South Korea.

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