Emerging market debt spreads narrow, ignore Treasury slide; Greentown China sells $400 million in notes

By Reshmi Basu and Paul A. Harris

New York, Nov. 3 - Emerging market debt saw tighter spreads Friday, despite U.S. Treasuries sinking on the back of solid U.S. non-farm payroll numbers.

In the primary market, mainland China property developer Greentown China Holdings Ltd. sold a $400 million offering of senior unsecured notes due 2013 (Ba2/BB) at par to yield 9%.

The deal came at the low end of price guidance of the 9 1/8% area.

The notes will be non-callable for four years. Meanwhile proceeds will be used to fund land acquisitions, for development costs and for general corporate purposes.

JP Morgan and UBS were joint managers for the Rule 144A/Regulation S deal.

Also pricing, Moscow-based JSCB Sberbank, via SB Capital SA, sold a $750 million offering of five-year loan participation notes (A2//BBB) at par to yield mid-swaps plus 80 basis points.

The deal attracted more than $1.3 billion in orders.

Barclays Capital, Deutsche Bank and Merrill Lynch were joint bookrunners for the Regulation S transaction.

Adding to the pipeline, Croatian food maker Agrokor DD plans to start a European roadshow for a euro-denominated offering of eurobonds (B2/B) on Monday.

The roadshow is scheduled to begin in London on Monday, Nov. 6, then Zurich and Geneva on Tuesday, Nov. 7, Vienna on Wednesday, Nov. 8 and will wrap up on Thursday, Nov. 9. The location is yet to be determined for the last date.

ABN Amro is the bookrunner for the Regulation S transaction. UniCredit Group is co-manager.

And Mexican copper products manufacturer Industrias Unidas, SA de CV is expected to price a $200 million offering of 10-year senior notes on Monday.

Price talk is for a yield in the 11½% area.

Morgan Stanley is the bookrunner for the Rule 144A/Regulation S deal.

The notes will come with five years of call protection.

The expected issuer ratings are B2 from Moody's Investors Service and B from Standard & Poor's.

EM tightens after job data

On Friday, spreads for emerging market debt tightened despite a sell off in U.S. Treasuries as the U.S. unemployment rate dropped to a five-year low.

During the early part of the past week, U.S. government bonds rallied on increased speculation that the Federal Reserve would cut the fed funds rate as soon as January, inspired by the week's heavy deluge of soft economic data.

But then on Friday, the Labor Department delivered a dose of reality to Treasuries. The jobs report suggested that the economy is expanding, which reduced the likelihood of lower interest rates, a premise that Treasuries were betting on.

The jobless rate fell to 4.4% while 92,000 non-farm jobs were created in October.

By session's end, the yield on 10-year note had shot up 12 basis points to 4.71% from the previous close.

However Friday's numbers did little to pressure emerging market spreads even though it created angst for Treasuries.

The market is vacillating between two different U.S. economic outlooks: the growth story and the slowdown story, noted sources. But whatever the end result is, investors are banking on the emerging markets fundamental story remaining intact.

If the economy sees the lower growth story while avoiding a recession and if the U.S. consumer continues to be on track, the market should see lower interest rates, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

In the other scenario, which was reinforced by Friday's jobs numbers, the United States enjoys an expanding economy, resulting in a static Federal Reserve.

In either case, growth should be strong enough to keep the commodity story alive, which has been a boon to emerging markets debt.

"On both sides of the equations, as long as it [economy] doesn't go into dire straights, it's still favorable to Latin America and that's what the market is trading on," remarked Alvarez.

Dollar prices down

Overall, spreads for the asset class narrowed while the market was down on a dollar basis.

In trading, the Brazilian bond due 2040 gave up 0.15 to 131.70 bid, 131.80 offered. The Mexico bond due 2026 lost one point to 159.10 bid, 160.10 offered. And the Venezuelan bond due shed 0.05 to 123.70 bid, 124.05 offered.

At the end of the week, spreads on the JP Morgan EMBI Global index tightened by 3 basis points to 185 basis points more than U.S Treasuries.

Moving to year end, spreads are expected to further tighten amid strategic inflows and low global volatility, according to a market source, who added that events in emerging markets have taken a backseat to the external U.S. picture.

The only trigger that could unravel the asset classes' momentum is a recession, noted Alvarez.

In the coming week, Russia's Bank Saint-Petersburg OJSC, JSC Astana Finance of Kazakhstan, China's Parkson Retail Group and Mexican copper products manufacturer Industrias Unidas, SA de CV are expected to tap the market.

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