Middle East remains solid amid Treasury softness; Aeropuertos Argentina could price soon

By Christine Van Dusen

Atlanta, Dec. 13 - Issuers from the Middle East kept their footing in the secondary market on Monday as Treasuries were softer and overall emerging markets activity was muted - with no new issuance - as is typical at this point in December and going into year-end.

The day was marked by the continued sell-off in Treasuries, with the 10-year yield hitting another recent high of 3.39% on Monday morning, a London-based trader said.

By the time of the London close, that number had backed off to 3.28%.

"Our market started off wary of the move in the underlying Treasuries before normal service resumed and we saw better buying this afternoon," he said.

The Markit iTraxx SovX index was slightly tighter on the day while the JPMorgan Emerging Markets Bond Index Plus was seen about 2 basis points tighter before closing 3 bps wider.

"EM assets had a mixed Monday lacking any real direction," according to an RBC Capital Markets report.

Argentina and Venezuela were both about 10 bps tighter, a Toronto-based market source said.

Middle East sees sellers

Among the movers in the secondary market on Monday were Dubai and Dubai Water and Electricity Authority.

Dubai's 6.396% notes due 2014 were seen trading at 99.35 bid, 99.65 offered. On Friday the notes closed at 99.25 bid, 99.50 offered.

"There's small retail demand [on Dubai]," the London-based trader said.

And the 6 3/8% notes due 2016 from Dubai Electricity and Water Authority that priced in October at par to yield Treasuries plus 522.1 bps were trading at 96.87 bid, 97.37 offered. On Friday, they closed at 96.75 bid, 97.25 offered.

"Dubai and Dewa are still trading well, with the street definitely after the front end of both curves," he said.

Dubai World back in news

A big driver: Sheikh Ahmed bin Saeed Al-Maktoum was named chairman of debt-saddled Dubai World and a new board was put in place. Credit default swaps for Dubai have moved 60 bps to 70 bps tighter since late November.

The day also saw Bahrain, Mumtak, Abu Dhabi Islamic Bank and Abu Dhabi's International Petroleum Investment Co. Kuwait Projects Co. (Kipco), meanwhile, continue to see buyers

Saudi Arabia's Sabic and Banque Saudi Fransi "remain solid in the Saudi space," the trader said. "These two credits just hold and hold into Treasury softness."

He was trading the Saudi Fransi 4¼% 2015 bonds - which priced in March at 99.543 to yield Treasuries plus 196.3 bps - at 108 bps over the curve.

"Overall, credits remain fairly well supported in the face of decent moves in the U.S. Treasury market," he said.

Mexico in focus

Also on radar screens on Monday was Mexico, which is said to be mulling swaps of local debt in 2011.

The sovereign also was under pressure after the weekend's news of a potential 50% hike in tortilla prices. That sent the rate curve higher, a market source said.

"This has understandably generated some investor focus because, if such a 50% increase were to occur, and given the 1.22% weight of corn tortilla in the [consumer price index,] it would imply an impact on inflation of more than 60 bps," according to a Barclays Capital report. "It also resonates with the significant increases in corn prices observed in recent months."

Still, investors should resist feelings of anxiety, the report said. Though a similar news report in 2008 raised concern, tortilla prices ended up rising far less than expected.

"Based on this experience - and although we have been highlighting that inflation will probably present a slight upward trend next year - we think an imminent tortilla-related inflation spike, unless there are further increases in corn prices, is quite unlikely," the Barclays report said.

Aeropuertos on tap

On the primary market front, the planned $250 million of notes from Buenos Aires airport administration company Aeropuertos Argentina 2000 could be among the last deals to come to market before 2011, a source said.

Credit Suisse and Morgan Stanley are the bookrunners for the Rule 144A and Regulation S transaction.

This deal is brewing at a time when borrowing costs are at a two-year low for Argentina. The sovereign is also in talks with its biggest creditors, which could bring spreads down even further, a source said.

Also impacting the picture is the sovereign's plan to exchange $335 million defaulted Brady bonds in an effort to secure even lower borrowing costs by ridding itself of the last debt from the sovereign's restructuring in the 1990s. Some sources believe this could encourage Argentina to issue new debt.

Otherwise, the primary market is expected to remain muted until after the holidays and into the new year, the Toronto-based source said.

"I would guess it will stay quiet," he said.

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