Hongkong Land prices bonds as EM assets post decent performance ahead of U.S. holiday

By Christine Van Dusen

Atlanta, May 25 - Hongkong Land Co. priced notes on a Friday that saw emerging markets bonds continuing to weather the euro zone's financial crisis better than some other asset classes.

"Euro markets are in a calmer mood given the absence of major news, with peripheral bond spreads generally narrowing, while French yields touched record lows," according to a report from RBC Capital Markets.

The Markit iTraxx SovX index spread started the day 5 basis points tighter, at Treasuries plus 332 bps.

"And retail investors are back in force on their favorite names," a trader said, pointing to Gazprombank and Vnesheconombank. "Even Ukraine is managing a bounce as the government makes noises on gas price hikes that suggest they recognize the need to keep the IMF happy."

But by the European close the Markit sovereign index was at Treasuries plus 342 bps, one of the widest levels of the week.

"That's despite repeated attempts to bid the market up," another trader said. "Even BTA Bank reporting an increase of capital shortage to $8 billion was not enough to generate a reaction."

Russia's Vimpelcom took a hit, widening by 30 bps on the day.

Overall, "it's understandably a lackluster session ahead of the United States' long weekend," a London-based trader said.

But in general, emerging markets bonds saw solid performance for the week, another trader said.

"We can reflect on another impressive relative performance by EM this week," he said.

Hongkong Land prints notes

In its new deal, Hongkong Land priced $500 million of 4½% 10-year bonds at 98.786 to yield 4 5/8%, or Treasuries plus 290 bps, according to a syndicate source.

Mitsubishi, Standard Chartered Bank and HSBC were the bookrunners for the Regulation S deal.

The notes are being issued under the property investment and management company's $3 billion medium-term note program, and proceeds will be used for general corporate activities.

"When you see demand for things like this, coupled with United Technologies doing an $8 billion deal yesterday, you almost forget the euro issues," a trader said.

Defensive posture urged

Some market-watchers are recommending that investors take a defensive posture.

"Transparency regarding global risk factors has worsened, making upcoming event risks more important," according to a report from RBC Capital Markets. "A robust policy response in the G3 could allow EM to trade off idiosyncratic factors again, but this is not likely to materialize in the near future. We remain defensive, favoring lower-beta and high grade credits."

Colombia, Mexico and Dubai could be good bets, according to a report from Barclays Capital Markets.

And "bond swap spreads suggest attractive valuations in Malaysia, Thailand, Taiwan, Czech Republic and South Africa bonds," the report said.

Severstal 'not in a rush'

Among Russian names, steel and mining company Severstal remained in focus on Friday after the previous day's report of weaker-than-expected first-quarter earnings.

In a conference call on Thursday, management "did not alleviate the concerns of a toughening operating environment," a London-based analyst said.

About $700 million of the company's debt matures in 2012 and $1.6 billion in 2013.

"With regards to its upcoming debt maturities, a bond issue will be subject to market conditions, but at the moment they are not in a rush," she said. "The group has sufficient cash and available liquidity to cover upcoming maturities without coming to the market."

Mixed bag for IPIC

In trading on Friday, Abu Dhabi's International Petroleum Investment Co. continued to garner attention, particularly the company's bonds due 2022 and 2041.

After closing at 104.12 bid, 104.62 offered on Thursday, the 2022 bonds were seen at 102.20 bid 102.70 offered on Friday morning. By the afternoon, the notes were trading at 102.12 bid, 102.62 offered.

IPIC's 2041 bonds - which ended Thursday at 106.75 bid, 107.50 offered - were quoted early Friday at 107 bid, 107.75 offered and later at 107.50 bid, 108.50 offered.

Dubai Water in focus

Also from the Middle East, Dubai Water and Electricity Authority's 2016 bonds remained tight, a trader said.

"But it is 1/3 the issue size of the 2020s and mostly locked away," he said. "[Dubai Water and Electricity]'s 2020s are tracking Dubai's 2020s, both 40 bps wider on the month."

The authority's 2016 bonds were trading Friday at 106.50 bid, 107.50 offered.

The trader was also watching Saudi Arabia-based Banque Saudi Fransi, which saw its 2015 bonds trading at 104.50 bid, 105.25 offered on Friday. The company's 2017 bonds were trading at 100.30 bid, 100.70 offered after being quoted at 100.40 bid, 100.70 offered on Monday.

Bahrain supply ahead

Looking to Bahrain, the sovereign's 2020 bonds were trading Friday at 97.75 bid, 98.50 offered.

"Ahead of supply, reportedly next month, the 2020s remain heavy," a trader said.

Bahrain's 2014 bonds were trading at 106 bid, 107 offered, while its 2018 bonds were seen at 106.62 bid, 107.62 offered.

"Selling before the weekend makes the most sense, as that's when the event risk comes," a London-based trader said. "It's only a long weekend in the United States, though, with Greece's bank holiday not coming until June 4."

Funds see big outflows

Emerging markets bond funds recorded their second biggest outflow level in the 21 weeks year-to-date, according to a report from data tracker EPFR Global.

For the week ended Wednesday, the funds saw outflows of $478 million. During the previous week, inflows totaled $633 million.

"In absence of decisive action by European policymakers, investors continued cutting their exposure to riskier asset classes and European equity heading into the final week of May as they trimmed their expectations for global economic growth and looked ahead to Greece's June 17 election," EPFR said in its report.

"Flows into bond funds lost momentum during the week ending May 23 as safe haven flows pushed U.S. and German debt prices to even richer levels and investors pulled back from some of the riskier fixed income asset classes," EPFR said.

The redemptions from emerging market bond funds were evenly split between funds with local and hard currency mandates, the report said.

"On a regional basis, flows in the past few weeks have shifted away from emerging Asia bond funds in favor of their Latin American counterparts," EPFR added.

Aleesia Forni contributed to this article

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