Italy's economic issues worry EM investors, issuers; Spreads widen; Trading volume thins

By Christine Van Dusen

Atlanta, Nov. 7 - Concerns about the European economic crisis - particularly Italy's problems - continued to plague the markets on Monday and were only slightly assuaged by the news that Greece's prime minister is poised to step down and a new unity government is expected to be put in place.

"That will likely help Greece secure its next tranche of aid payment," according to a report from Barclays Capital. "While we regard this as marginally positive news, we believe what matters more for markets in the near term is the relatively disappointing outcome of the G20 meeting, given the lack of progress on backstop facilities."

And Italy's issues are even more troubling, market sources said.

"It's all about Europe and Greece and Italy, and the overall macro picture," said Nick Chamie, head of emerging markets research for RBC Capital Markets. "As a result, EM is moving in lockstep with other global markets. We're seeing bond spreads a bit wider and ticking along in very thin volumes."

Though last week there were days when investors viewed EM debt as something of a safe haven, the problems with Italy are just too big for that kind of stance, he said.

"The worrying dynamics in Italy are causing investors to take a step back and reevaluate any thoughts they had about dipping toes into the market," he said. "The Italian debt market is huge, and yields keep skyrocketing and increasing chances that Italy could end up in dire straits like the other countries that have needed a bailout.

"Given the large size of the problem and considering the risks involved, people are a bit more hesitant. It's one thing to have Greece in trouble. It's an entirely different thing with a country that has a debt market the size of Italy."

These concerns, plus the current Eid al-Adha holiday in the Middle East, made for a quieter and weaker day for emerging markets assets. Even so, Peru's Intercorp Retail Trustee advanced its planned deal, and a few other issuers - including India's Bharti Airtel Ltd. and Argentina's Empresa Distribuidora de Electricidad de Salta SA (EDESA) - took steps toward the market.

Intercorp Retail guidance

Peru's Intercorp Retail Trustee set price talk for its $300 million issue of seven-year notes at the 8 7/8% area, a market source said.

Bank of America Merrill Lynch and JPMorgan are the bookrunners for the Rule 144A and Regulation S notes, which are guaranteed by Intercorp Retail, a member of the Lima-based IFH Peru Ltd. group of financial and commercial support companies.

In other news from Latin America, Brazil-based engineering and chemical conglomerate Odebrecht SA on Friday priced a $250 million tap of its existing perpetual notes at par to yield 7½%, a market source said.

HSBC was the bookrunner for the Rule 144A and Regulation S notes.

Bharti Airtel mulls notes

India-based telecommunications company Bharti Airtel is considering an issue of notes that would total between $750 million and $1 billion, a market source said.

The company concluded a non-deal roadshow on June 10 with Barclays Capital, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC and Standard Chartered.

And Argentina-based power company Edesa is planning a $65 million offering of notes, a market source said.

No other details were immediately available on Monday.

ICE oversubscribed

In other deal-related news, the final book for the recent $250 million issue of notes from Costa Rica-based electricity provider and telecommunications operator Instituto Costarricense de Electricidad (ICE) was about $2 billion, a market source said.

The notes due 2021 priced at par to yield 6.95% via Citigroup and Deutsche Bank in a Rule 144A and Regulation S offering.

The proceeds will be used for debt refinancing and capital expenditures.

Middle East trading quiet

Trading in the Middle East was relatively slow on Monday, given the Eid al-Adha holiday.

"It's going to be quiet," a trader said. "The theme continues to be the buying of the long end of International Petroleum Investment Co."

The Abu Dhabi-based oil investment entity's 2041s saw two-way flow early in the session - sighted at 102.50 bid, 103.25 offered - while the rest of the curve traded heavy, he said.

Vimpelcom lags, Turkey down

Looking to Russia, the Vimpelcom curve was an underperformer, down about 1 to 1½ points, a trader said.

"The rest of the corporates are trading very heavy," he said.

Russia's quasi-sovereigns, meanwhile, were marginally weaker in the morning. "But there's no selling yet," he said.

By afternoon, most of the bonds were better bid but still wider on the day, he said.

From Turkey, very thin volumes were reported due to the Eid holiday.

"Corporates and benchmarks are generally weaker by 10 bps or so, in line with the broader market," he said.

Prices up for Argentina

In other trading on Monday, dollar bonds from Argentina were up as a result of a regulation overhaul, Barclays said in another report.

"On Oct. 26, 2011, the Argentine insurance regulator forced a repatriation of 'external assets,' which should happen before December 15, 2011," Barclays said.

"Insurance companies hold about $1.6 billion in external assets," according to the report. "To accommodate their positions to the new regulation, they are bidding up the dollar bond curve, but it is difficult to know how much they have bought already."

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