South Korea's KNOC sells notes on firm, then weaker day for EM; Kuveyt Turk sets talk

By Christine Van Dusen

Atlanta, Oct. 19 - Emerging markets bonds saw an early rally fade a bit on Wednesday as caution crept in ahead of the weekend's meeting of European leaders and amid weaker economic news from the United States.

"Things are definitely firmer, but it's not one of the lift-a-thons yet," a trader said during the European morning.

Bonds from emerging Europe, Middle East and Asia opened about 10 basis points firmer, a London-based trader said.

"All the broker screens are full of prices once again - albeit wide - and the chaos of the last few weeks seems consigned to history," he said.

But later in the day, the rally receded, particularly for Latin America, as the Federal Reserve's Beige Book noted weakened economic activity and heightened uncertainty in the United States.

"What started out as a strong day is really showing a reversal here as equities have also turned negative," a New York-based trader said.

Against this backdrop, Korea National Oil Corp. priced notes and market-watchers focused on the topic of new issue discounts. One trader pointed to Abu Dhabi's International Petroleum Investment Co., which is on a roadshow for an issue of notes via Barclays Capital, JPMorgan, Mitsubishi UFJ Securities, Natixis and Societe Generale.

"IPIC is already underperforming the rest of Abu Dhabi by 20 bps to be in line with the recent Turkey new issue discount," he said.

Said another trader, "There's reportedly a good cross-section of investors attending [the IPIC roadshow], so it will be interesting to see what comes out of these presentations."

KNOC sells bonds

In its new deal, South Korea-based national oil and gas company KNOC sold $1 billion 4% notes due Oct. 27, 2016 at 99.387 to yield 4.137%, or Treasuries plus 310 bps, a market source said.

Barclays Capital, Bank of America Merrill Lynch, HSBC, Korea Development Bank and RBS were the bookrunners for the Rule 144A and Regulation S deal.

And looking at a recent new deal, Turkey's issue of 2022s tightened by about 10 bps early in the session, a trader said. The $1 billion issue of 5 1/8% notes priced at 98.94 on Monday to yield 5.259%.

The deal's final book was $3 billion from 150 accounts, with 36% from the United States, 31% from Turkey, 16% from the United Kingdom, 14% from Europe and 3% from Asia and others.

Funds accounted for 48%; banks 38%; central banks, insurance and pension funds 8%; and others 6%.

"Turkey is very strong at the open," another trader said.

Kuveyt Turk gives guidance

In other news from Turkey, Istanbul-based Islamic financial institution Kuveyt Turk Katilim Bankasi AS set price talk for its planned five-year issue of up to $350 million notes at the 6% area, a market source said.

HSBC, Liquidity Management House and Standard Chartered Bank are the bookrunners for the sukuk issue, which was marketed on a roadshow from Oct. 10 to Oct. 18.

"Despite the relative plain-vanilla business model of the bank, the BBB- rating from Fitch and it being a sukuk issue, we believe around 6% is optically rich," a trader said.

The Islamic banking sector is at its infancy in Turkey, where there is no Shariah-compliant mechanism replicating the repurchase agreements routinely available to conventional banks, he said.

"In this environment, where the Central Bank of Turkey is expecting a slowdown in the economy, participation banks will possibly be more vulnerable than conventional banks due to the high concentration of credit on their balance sheets," he said. "To put it into context, Kuveyt Turk's balance sheet is 1/10 of Akbank's. We feel that, despite the relative small size of the issue and its sukuk status, the yield should be closer to 6½%."

Sukuks stay solid

Sukuks, overall, had a solid day. And Dubai staged a comeback, particularly in Dubai Holdings' 2014s.

"Sukuks had another power day. And look at Dubai Water and Electricity Authority's 2016s on the month - unchanged," he said. "Dubai names continue to attract buyers, with DEWA's 2015s up at 107.875, almost 5 points off the low two weeks ago."

Lebanon's long end stayed steady while bonds from South Africa were "a beacon of stability," he said.

Qatar was popular, with long-end corporates and quasi-sovereigns catching a bid after lagging, a trader said. Bahrain bonds were quiet, and Saudi Arabia was well supported while Kuwait's Kipco was popular with retail investors.

Ongoing demand was noted for Dolphin Energy, Abu Dhabi National Energy Co. and Mubadala.

Africa sees solid performance

Bonds from Africa were seeing solid week-on-week performance, another trader said.

"Nigeria's 2021s are back to unchanged on the month," he said. "I see no value in Egypt's 2020s, but plenty of others do."

In other trading, Ukraine was rallying early Tuesday, with demand sighted for corporates like Metalloinvest and Naftogaz.

There was "very strong performance again," a trader said. "There's not much volume, but the whole Ukraine curve is marked more than a point higher."

At the close, sovereign bonds were 1 point to 1.5 points higher, with Ukraine's 2021s continuing to get squeezed.

"They're trading 1¾ points higher than the 2020s," he said. "The laggard continues to be City of Kiev, which hasn't bounced significantly at all."

Gazprom firms

Russia-based Gazprom started the day very firm, a trader said, while KazMunaiGaz underperformed amid a lack of liquidity.

Looking to Latin America, Brazil's sovereign bonds took a hit late in the session on Wednesday, the New York-based trader said.

"We're seeing a number of different credits get hit in the Street, with no depth whatsoever to the bids getting tagged," he said.

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