Ratings upgrades help credits, but U.S. economic data disappoint; Croatia prints notes

By Christine Van Dusen

Atlanta, July 6 - News of ratings upgrades for Ukraine and Qatar sent only a small ripple of optimism through emerging markets as yet another round of U.S. economic data proved disappointing and market-watchers were once again distracted by the World Cup.

But the little bit of positive sentiment still managed to make a small difference on Tuesday, nudging trading volumes up and encouraging some issuers to bring deals to market.

"The market is very solid overall," a London-based trader said.

The tone was "strong but cautious" and volumes were "decent considering this is a vacation week for many in the market," a New York-based trader said.

Ratings give boost

The market was boosted somewhat on word that Fitch Ratings raised Ukraine's credit rating to B from B- and Standard & Poor's pushed Qatar's rating up to AA. This was tempered by the news that the U.S. non-manufacturing economy sputtered in June. Yields on 10-year Treasuries fell for most of the day.

Still, "it's all sort of net positive for the market," said Luz Padilla, portfolio manager for the DoubleLine emerging markets fixed income fund. "I think people are a lot more hopeful today. It seems like the market has bounced back a little bit and opened for business."

Another London-based market source agreed. "It's been very dull but generally a better day with equities," he said. "It's very muted. I've been trying to talk some activity with clients and look for opportunities, but it feels like the middle of August. A lot of people are away, so it's been a really dull day."

Indeed, trading was "on the lighter side," Padilla said. But it was no worse than in previous days, when volumes were exceptionally thin.

Sberbank, VEB trade higher

Movers in the secondary included the $1 billion issue of 5.499% notes due 2015 from Moscow-based bank Sberbank, which priced last week at par to yield mid-swaps plus 345 basis points.

As of mid-morning in New York that issue was trading at "100.125 to 100.25," the London-based market source said.

He was also watching the $1 billion issue of 6.902% notes due 2020 from Moscow-based lender Vnesheconombank, or VEB, which priced last week at par to yield Treasuries plus 400 bps. The note issue was trading at 101.06 to 101.31 at mid-morning, he said.

Argentina and Brazil were "met with light buying, to push them up about ½ point," the New York trader said.

Venezuela, meanwhile, "was bid higher to open but subsequently was hit throughout the day as reports of a hard currency shortage continued to exacerbate and pressure assets," he said.

Overall, the secondary was "doing well" on Tuesday, Padilla said. "I think this positive sentiment has helped new issues. They have the good technicals backdrop as well. How long this lasts, though, depends on what else we get. The numbers out of the United States seem to be worse than expected. But we just need to shrug them off."

Croatia prices notes

The primary market was "dull" on Tuesday, the London trader said.

Only one new issue crossed his radar screen, namely Croatia's $1.25 billion 6 5/8% notes due 2020, which priced at 99.102 to yield 6¾%, or Treasuries plus 381 bps.

Barclays, Citigroup and JPMorgan were the bookrunners for the Rule 144A and Regulation S deal.

"It priced cheap relative to the existing curve," a market source said. "People like that, the fact that they are getting a bit of a concession. So there's potential for this bond to do well."

Apart from that deal, "it's stronger but activity's been very, very slow," the trader said.

Akbank, VTB plan deals

Tuesday did see two other issuers take steps closer to market. Istanbul banking company Akbank is planning to issue a five-year eurobond worth up to $1 billion, a market source said.

Proceeds will be used for general corporate purposes, according to a Fitch Ratings report.

And VTB Bank will start marketing a Swiss franc-denominated offering of notes on July 8 with VTB Capital and BNP Paribas.

VTB's plans follow on the heels of several other deals from Russian banks like Sberbank, Promsvyazbank and Vnesheconombank. TransCreditBank is expected to price soon.

"That region seems to be making a breakthrough right now," Padilla said.

That's due in part to improvements in Russia's economy and an increase in bank deposits. But Padilla attributes the sector's activity primarily to the fact that the companies are quasi-sovereigns.

"From that perspective it's a lot easier to place those deals because there is the expectation of some support from the government, as we've seen in the past," she said. "After the big Russian sovereign deal that priced earlier in the year, some of these other quasi-sovereigns probably held back. They needed to let the market digest that. Now it has, and there's a new window, so I think other deals will be coming."

But not every Russian bank is faring well these days. International Industrial Bank has defaulted on €200 million of bonds that matured Tuesday and could offer up a restructuring proposal soon.

Cash on sidelines

Padilla also expects Latin America to pick up steam again after recent dormancy.

"Maybe we'll see Brazil, some of the Mexico corporates, maybe Peru," she said.

"For the moment people are choosing to look on the brighter side of things," she said. "The technical side of our market is still relatively strong. We continue to see inflows into the market. I think people still have money to put to work. So there is good potential demand for new issues, especially when they come attractively priced."

There's a lot of money waiting to be put to use, the New York trader said. So everyone will be watching closely "to see how much money is put to work across the EM universe as new issues will continue to churn out, market permitting, forcing new money off the sidelines."

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