Emerging market debt on roller coaster ride; Bank of East Asia sells £300 million perpetual bonds

By Reshmi Basu and Paul Deckelman

New York, March 14 - Emerging market debt saw a firm but volatile session Wednesday as it traded in tandem with a rocky performance in U.S. equities.

In the primary market, Bank of East Asia sold a £300 million offering of perpetual subordinated bonds (Baa1/BBB) at 99.622 to yield a spread of 120 basis points more than Gilts.

The bonds will be callable on March 21, 2012. If the bonds are not called, the coupon steps up to three month sterling Libor plus 80 basis points.

UBS Investment Bank was the bookrunner for the transaction.

Also, Dubai Islamic Bank sold a $750 million debut offering of five-year Islamic floating rate notes at par to yield 33 basis points more than Libor.

Barclays Capital, Citigroup and Standard Chartered managed the sale.

Dubai Islamic Bank is a Dubai, United Arab Emirates, provider of banking services based on Islamic principles.

Adding to the pipeline, Gazprombank (Baa2/BBB-) has mandated Dresdner Kleinwort and UBS Investment Bank to lead a sale of dollar-denominated bonds.

The expected benchmark-sized offering will be sold under Regulation S.

Investor presentations are expected to start on March 19.

Gazprombank is a joint-stock bank of the gas industry and a subsidiary of Russian energy giant Gazprom.

According to news reports, the issuer said it would raise $3 billion in foreign markets this year.

In the rumor mill, Venezuelan state oil monopoly PDVSA is expected to announce a debt issue up to $3.5 billion this week, according to a market source.

EM firmer on seesaw ride

Back to the broader market, emerging market debt achieved tighter spreads amid a volatile session Wednesday as it tracked the topsy-turvy U.S. stock market.

Heightened worries over the U.S. sub-prime mortgage market derailed equities earlier in the session as the Dow Jones Industrial Average dipped below 12,000 for the first time in four months.

Eventually the stock market clawed back from a 130 point deficit to close the session on a positive note. The Dow Jones Industrial Average finished the day at 12,133.40, up 57.44.

But a rollercoaster ride for equities resulted in a choppy trading session for emerging markets, noted market sources. The debt market opened up weaker but then traded cautiously on the equity rebound.

At the close of the session, the JP Morgan EMBI Global index was flat on a dollar basis while its spreads were tighter by 3 basis points versus U.S. Treasuries.

Ecuador was among the session's best performer as its spreads tightened by 8 basis points, shrugging of the political standoff between congress and president Rafael Correa.

High beta credit Argentina was also a solid performer as its spreads tightened by 7 basis points. And high oil prices gave support to Venezuela, which saw its spreads narrow by 5 basis points.

Latin American corporates off

On the Latin American corporate front, a trader observed that there was a lot of "volume when U.S. equities seemed to capitulate around midday through the 12,000 level on the Dow, but [it has] been very quiet since."

He said that the average 10-year corporate was off about ¼ to ½ point on the day.

Among Brazilian benchmark corporate names, petrochemical company Braskem's 8% bond due 2017 was spotted down 0.14 to 105.25 bid, 106.31 offered. Electricity company ISA Capital's 8.8% bond due 2017 was seen down 0.19 to 105.05 bid, 106.18 offered. And mining company CVRD's 6¼% bond due 2017 was quoted lower by 0.65 to 102.12 bid. 102.58 offered.

Asia sees better tone

A trader in Asian issues said that he saw "a much better tone" Wednesday in New York after "a reasonable turnaround in terms of market sentiment and just overall spread tightening."

Emerging markets debt, he said, "has been tracking equities very, very closely now for a couple of sessions," and Wednesday was no exception - but the difference was that "even when stocks were hitting their lows, people realized that there wasn't a great deal of selling going on, so as soon as things [on the stock market side] turned around, we bounced back pretty well."

He allowed that "whether or not we continue to be so tightly correlated with equities remains to be seen - but we have to think that, in the absence of significant selling, it's likely that we're going to decouple [from equities], or at least be less correlated."

This will translate to "dips and sell-offs [in emerging debt] going to be less extreme than the guys in the equity market are seeing, and advances are going to be sharper. So it's going on a pretty good note."

The most widely traded Asian instrument, the five-year CDS contract on Philippines sovereign debt, opened trading in the 132/136 basis points level, widened out as far as 137 bps, "and then came running back in" later in the session to end around 129 bps over, which he called 8 bps off the day's wides, and about 5 bps tighter than the mid-point level at the opening.

CDS activity in Indonesian debt followed pretty much the same pattern, with spreads about 2 or 3 basis points tighter than the Philippines CDS, although the trader said that Indonesian contracts were "not as volatile, not as actively traded" as the Philippines, "but pretty much trading in lockstep."

He said there was "reasonably good selling interest in CDS at the wides."

Among the underlying bonds, "you're really not seeing a great deal of selling in cash markets," with the long end of the Philippine curve, such as the 2031 and 2032 bonds up ¼ point on the day, and about 5 bps tighter spread-wise than it was on Tuesday afternoon.

The tightening activity seen during the New York trading day, in line with Wednesday's stronger U.S. stock market, stood in robust contrast to the downside activity seen earlier in Asia, which took its cues from Tuesday's big U.S. stock slide motivated by worries about the subprime lending sector amid mounting delinquencies by borrowers.

At one point during the Asian session, yields on the benchmark seven-year Philippine issue widened out by 19 bps - its biggest jump in two months - to 6.69%.

The 2032 bonds were being quoted in Asian trading as having retreated to 96.625 bid, 97 offered, down about ¾ point.

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