Emerging markets debt eases; Pakistan sized below expectations; Reliance completes euroyen deal

By Paul A. Harris

St. Louis, March 23 - Emerging markets debt was closed out the U.S. session slightly weaker, with the move impacting both Latin America and Asia.

Meanwhile terms emerged on a two-part dollar-denominated sovereign deal from Pakistan that came in at an overall size well below what the market had been anticipating.

In primary market action on Thursday, The Islamic Republic of Pakistan (B2/B+) completed an $800 million two-part sovereign bond transaction which, according sources, had decreased dramatically from its initially anticipated size.

Pakistan priced a $500 million issue of 10-year notes at par to yield 7 1/8%, on top of price talk, and a $300 million issue of 30-year notes at par to yield 7 7/8%, on the wide end of the 7¾% to 7 7/8% price talk.

Deutsche Bank, Citigroup and JP Morgan were the managers.

A buy-side source told Prospect News on Wednesday that the market had initially anticipated $1.5 billion of combined issuance from Pakistan. On Wednesday, the source added, the overall amount had decreased to $1.25 billion maximum.

On Wednesday morning a market source said that 65% of the demand had been in the 10-year paper and 35% in the 30-year tranche.

A source who focuses on Asian fixed income but was not involved in the Pakistan transaction said that the deal had undoubtedly been hurt by movement in Treasuries - a 10 basis points move, the source said - from when Pakistan first announced late last week and Thursday's pricing.

With regard to the bonds maturing in 2036, the source added that Pakistan's existing paper had come with a five-year maturity and the investors who buy Pakistan don't like to extend duration that much.

Investors who chose the 30-year paper over the 10-year were only paid an extra 75 basis points for doing so. However the source who focuses on Asian debt said that Indonesia recently priced an new issue maturing in 2017 and tapped its existing bonds maturing in 2035, and the longer-dated paper came a mere three-eighths behind the shorter paper.

This source also commented that at present it is not an easy market into which to bring deals

"The backdrop is not great," the source said.

"You start a roadshow and the market could shift over the course of a bookbuilding process.

"That's what happened to Pakistan. The market was alright when they started off on Friday and Monday, and things weakened out since then.

"People that don't have to come are unlikely to take the market risk."

Reliance prices euroyen deal

Meanwhile from Pakistan's neighboring country, India, terms were heard Thursday on a corporate deal from Reliance Industries Ltd.

The Mumbai-based conglomerate priced a ¥17.5 billion issue of 2.86% euroyen notes (Baa2/BBB) at a 90 basis points spread to yen swaps on Thursday.

The spread came at the tight end of the yen swaps plus 90 to 95 basis points price talk.

ABN Amro, Citigroup and Deutsche Bank led the deal.

Brazil leads Latam down

Prices were softer throughout Latin America on Thursday, according to Enrique Alvarez, Latin America debt strategist at think tank IDEAglobal.

Alvarez said that the unease that was in the market a couple of weeks ago regarding U.S. interest rates and the tightening cycle is slowly starting to creep back into the market mentality.

"It's shaping a small retrenchment in pricing," he asserted.

The strategist spotted Brazil's benchmark bonds maturing in 2040 at 129 bid, 129.95 offered, down 0.45 on the day and added that the Latin American EMBI was flat on the day in terms of spread, but down 0.26% in terms of returns.

Meanwhile Venezuela's bonds maturing in 2027 turned out to be "a curiosity" on Thursday, Alvarez said, spotting the paper at 125.35 bid, 126 offered, off 0.30.

"Venezuela should better portray the oil price rise that we've seen today," he commented.

Peru tracking the market

Alvarez also said that Peru's bonds, which have traded off dramatically in recent weeks but had been seen to stabilize somewhat on Wednesday, were no worse on Thursday that the rest of the Latin sovereign paper.

Earlier in the week a source told Prospect News that Peru's long bond, the 8¾% paper maturing in November 2033, traded as high as 122.75 bid at the end of February but slid to around 110 bid in mid-March.

The sell-off, sources say, is related to the rising fortunes of Peruvian presidential candidate Ollanta Humala, a leftist and a former military officer who is campaigning on a platform of higher taxes and tighter restrictions on foreign investments.

On Thursday Alvarez had the Peru bonds due 2033 at 110 bid, 111 offered, slightly off with the rest of Latin America.

He added that 110 seems like a good support level for this bond,

Alvarez also confirmed that Peru's paper is getting hit not only on the long end of the curve but also in the middle of it.

"There are basically three points on the curve from which to look at Peru, the 2012 bond, the 2025 bond and the 2033 bond," he said.

"The 2012 and 2025 bonds are also getting killed.

"The blood-letting across the curve is symptomatic of the sell off being political-related as opposed to actual curve dynamics or U.S. Treasury dynamics."

The IDEAglobal strategist said that Peru's election could actually affect the country's long-term capacity to pay or willingness to pay debt.

"That's why people are in an uproar, and why you're seeing such a large displacement in prices."

Asia also trades down

Meanwhile a trader who focus on Asian fixed income said that Asian paper was also softer Thursday, but added that it had not traded down as extensively as Latin American bonds.

Most of the movement was seen in the Philippines, with the long end of the curve trading down half to three-quarters of a point from the Asian close to the U.S. close, the source said.

"There has been some selling," the trader commented, adding that five-year credit default swaps were wider by four or five basis points, but again the moves were not as dramatic as those seen in Latin America.

Indonesia was also a quarter of a point to three-eighths of a point lower on not much volume.

Meanwhile, the trader said, high-grade spreads were more or less unchanged from the U.S. open.

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