Bladex, Shinhan pick leads on 'nervous,' 'fragile' day for EM debt; sovereign buying seen

By Christine Van Dusen

Atlanta, Sept. 20 - Though equity markets had a somewhat head-scratchingly positive session on Tuesday, emerging markets debt saw no such boost as investors continued to sit on their hands and issuers awaited a better opportunity for bringing new deals to the market.

Contributing to the day's hesitant tone were the anticipated remarks from Federal Reserve chairman Ben Bernanke as well as a ratings downgrade for Italy.

"Despite an improving late trend to U.S. equities, risk is selling off again following the announcement of a one-notch downgrade by S&P to Italy's rating, to A, with the outlook negative," according to a report from RBC Capital Markets.

In response, the EM debt market seemed to be on pause on Tuesday, a New York-based market source said.

"Everyone's trying to assess whether there's significant risk to either the upside or the downside, and everything seems to be on hold," he said. "I think the FOMC statement will set the tone in the next few days. But the simple message in EM at this point is that the market remains incredibly fragile."

Against this backdrop, there was some investor willingness to take on liquid sovereign exposure, but cyclical corporates were for sale, a trader said.

And two issuers - Panama-based lender Banco LatinoAmericano de Exportaciones SA (Bladex) and South Korea's Shinhan Bank - mandated banks for dollar-denominated offerings.

"But nobody truly expects to be able to find a trade in this market," the New York source said. "The pipeline remains but levels have materially changed."

Said another trader: "Despite the relative stability today it must be stressed that the market remains very nervous with sufficiently wide spreads to contain activity to essential business."

Flows 'relatively active'

Though spreads were indeed wider, they weren't fantastically so, a London-based trader said.

"There remain a lot of bonds where there are buying programs and shorts in the markets, and these bonds are fine," he said. "Then there are the bonds where there are still some loose bonds flying around, or more international accounts are playing in and they are more choppy and volatile."

The worst performers were 10 basis points to 15 bps wider, he said, while the best performers were 15 bps to 20 bps tighter.

"Flow-wise, today was relatively active," he said.

Retail activity was seen for Kuwait's Kipco, Dubai, Dubai Water and Electricity Authority, International Petroleum Investment Corp. and Qatar's Qtel International.

"There were only sellers on Qtel's 2021s, versus only buyers on the 2019s," he said.

Middle East in focus

Most names from Bahrain were holding up fairly well, he said. Buyers were seen for Emaar Properties and Emirates airline, and some sellers were noted for the Dubai sovereign. And Ras-al Khaimah remained fairly illiquid.

"Volumes are moderate and spreads, for choice, are slightly tighter at the close," he said. "The market is trying to firm up a little into the close, ahead of [Ben Bernanke's remarks]. Let's see if he can refill the punchbowl again."

Morocco bonds stay strong

In trading from Africa, Morocco's 2017s remained rock-solid. And Cairo-based African Export-Import Bank (Afreximbank) saw its 2016 notes trading at 98.50 bid, 99.25 offered.

"We're seeing slightly more buyers than sellers, but there is paper in the Street, having traded down at 99.125," a trader said. "Looking through the trade history, the highest I traded this bond was about 102.62 bid, 102.75 offered, so all told it's off about 4 points."

Month over month, the notes are about 46 bps wider, he said.

"I've also seen some 2014s come out from retail," he said. "In markets like these, African names really do suffer from illiquidity. In Afrexim there does however remain a degree of liquidity, especially in the 2016s. It looks like a good value, but again the market is not functioning much on value at the moment."

Turkey news boosts bonds

Market-watchers were talking Tuesday about a headline that reported an upgrade in Turkey's rating to investment grade. However, it was later revealed that only the sovereign's local currency rating got a boost.

"Despite that, it has provided some positive impetus to Turkish risk, which is 5 bps tighter today," a trader said.

Looking to the Ukraine, some sovereign buying was seen on Tuesday. "There is patchy demand for Ukraine corporates for the first time in a week, although overall it's still weak," a trader said.

From Russia, metals and mining companies were under pressure.

"But oils are doing OK, and there's just the usual horse-trading in Vimpelcom's 2022s," he said, pointing out that those notes were trading at 90.50 bid, 91 offered on Tuesday.

For Gazprom and KazMunaiGaz, some curve-flattening was reported.

And Kazakhstan-based BTA Bank's 2018s were getting closer to the 30% yield, but there remained some two-way interest.

Investors await stability

For the most part, though, investors remained on the sidelines, the New York-based source said.

"The good news in EM is that we haven't seen forced redemptions, or outflows from dedicated EM funds, which has not led to forced selling in the secondary. That's a relatively good sign," he said.

Investors are sitting on a reasonable amount of cash, as the fund flows suggest, he said.

"But nobody is willing to step in front of a falling knife," he said.

Bladex, Shinhan tap dealers

In deal-related news, Panama-based lender Bladex has mandated banks for an offering of up to $200 million of notes, a market source said.

The notes are expected to carry a tenor of between five and seven years.

The names of the banks were not immediately available on Tuesday.

Also tapping leads on Tuesday was South Korea's Shinhan Bank. The Seoul-based lender has mandated Bank of America Merrill Lynch, BNP Paribas, Deutsche Bank, HSBC, Shinhan and Standard Chartered Bank for a dollar-denominated offering of notes, a market source said.

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