Spreads widen, prices fall as risk markets lose steam on China, Brazil news; primary quiet

By Christine Van Dusen

Atlanta, Oct. 19 - New issuance slowed to a standstill on Tuesday as emerging market investors continued digesting recent supply - including $3 billion in new paper from Venezuela oil company PDVSA - and turned away from risk in part due to news of tightened monetary conditions in China and a tax hike on investments in Brazil.

"We're seeing risk markets heading lower," said Luz Padilla, portfolio manager for the DoubleLine Emerging Markets Fixed Income Fund. "It could be part of a normal correction. We've had very one-way sort of trading, so this could be a little bit of a give-up."

But the main reason for the negative shift in risk sentiment was the news out of China and Brazil.

"That's making its way through the market," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "All of this combined is effectively holding the market hostage for the day and pressing most asset prices down."

It's unclear whether the day's "weak backdrop was an exaggerated knee-jerk reaction or the beginning of a new extended profit-taking move," RBC Emerging Markets Research said in a report.

Pullback on China news

China's decision to hike interest rates by 25 basis points came "as a surprise to some" and led the market to sell risk, according to a report from RBC.

"The rationale behind this is that very easy Chinese monetary conditions have been one of the primary drivers for global asset demand" and that "this start to the rate-hiking cycle will tighten monetary conditions, thus reducing demand from China at the margin."

There was a "knee-jerk reaction" from the market, Alvarez said.

"In general there has been a pullback," he said. "I think the market overall on a regional basis has used that as a motivation for profit taking."

Brazil hikes tax

Also contributing to this, he said, was the raised tax imposed on foreign investment in fixed-income securities in Brazil. This is the second such increase by the sovereign.

Brazil's decision is "not surprising because they have been for a while aggressive in their discussions regarding their currency and the fact that they felt this was a 'currency war,'" Padilla said.

"But I'm not sure anybody thought they would do this or do it this soon. They thought perhaps after the second round of elections were completed we'd see some more measures come out," she said. "This is a little bit on the early side."

Spreads widened by early afternoon, with Venezuela up by 13 bps, Argentina up by 8 bps and Brazil by 6 bps.

Prices, meanwhile, were "lower by 1 to 1½ points in the higher-beta credits as Argentina's 2015s move to 91.40 and Venezuela's 2022s trade down to 85.50," a trader said.

Mexico's 100-year bond moved to 96.20 from a high of 101.80 last week, he said. "Overall volumes are still on the lighter side, compared to prior weeks."

PDVSA swap attractive

On Tuesday the market was also keeping an eye on the recent issue of $3 billion 8½% bonds due 2017 from state-owned oil company Petroleos de Venezuela SA (PDVSA). The deal priced Monday at par and was offered concurrently with a debt swap of $3 billion 2011 local-law bonds for a new 8% semiannual 2013 Luxembourg law bond.

Although the proposed price premium paid to holders of the 2011 bonds "has narrowed due to market price increase," the swap offer remains attractive "given the ability to swap a zero coupon bond under local law for one with a coupon of 8% under New York law," according to a report from Barclays Capital.

In terms of the new notes, "excess amount of issuance is the norm in Venezuela," Alvarez said. "In this slightly changing environment I would visualize at least some downside pressure."

Padilla expects that the sovereign and companies like PDVSA will remain "serial issuers," she said, "because they need to keep issuing to keep their domestic organizations supplied with enough paper to make their currency system work."

Asia stays busy

Asia remained in focus on Tuesday, with Hong Kong-based shipping company Noble Group Ltd. planning to embark on a roadshow Wednesday and Thursday for a dollar-denominated issue of perpetual notes with JPMorgan, RBS and Standard Chartered, a market source said.

Proceeds will be used for general corporate purposes.

Also from Asia, Korea-based steel producer Posco has mandated BNP Paribas, Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and Morgan Stanley for its planned dollar-denominated benchmark-sized global bonds, a market source said.

A roadshow is underway for the deal, which is expected to total up to $700 million.

And Philippines-based tourism conglomerate Travellers International Hotel Group has mandated Deutsche Bank and UBS as bookrunners for a planned dollar-denominated offering of bonds due 2017, a market source said.

The Regulation S transaction is expected to launch after a roadshow this week in Hong Kong and Singapore.

In other news from the Philippines, the final book for lender Banco de Oro Unibank Inc.'s $300 million 3 7/8% senior unsecured notes due 2016 - which priced last week at 99.632 to yield 3.95%, or Treasuries plus 278.5 bps - was $1.8 billion with 88 accounts involved, a market source said.

About 34% came from the Philippines, 46% from the rest of Asia, and 20% from Europe. Funds accounted for 56%, banks 36% and private banks 8%.

Russia, India also in focus

"Two or three weeks ago the bulk of new issues were from Latin America, and now we're starting to see Asia, Africa, the Middle East and Central and Eastern Europe coming to market," Padilla said.

She pointed to the Posco deal, as well as the benchmark notes planned by Russia-based maritime shipping company Sovcomflot JCF through SCF Capital Ltd., which could price as soon as Wednesday.

Also upcoming is a $1 billion issue of notes due 2020 from Russian diamond mining subsidiary Alrosa Finance SA and seven-year notes of up to $750 million from Kazakhstan-based lender Kazkommertsbank. Both are being marketed on roadshows this week.

The next deal to price could be the $100 million senior secured notes due May 2016 from Brazil-based soft-commodities trading company Ceagro Agricola Ltd. Guidance has been set at the 11% area for the Rule 144A and Regulation S deal via Jefferies. The books closed Tuesday.

"That's a small deal," a market source said. "It's a very small company, so we're just going to monitor the company and see if it makes sense to get involved later on."

Also coming soon, the source said, could be some deals from Indian banks. Mumbai-based lender Icici Bank "is rumored to be coming soon," the source said, along with Export-Import Bank of India (Exim Bank).

Islamic Development Bank sets talk

The final books for state-owned utility company Dubai Electricity and Water Authority's recent $2 billion issue of senior notes due 2016 and 2020 were more than five times oversubscribed, a market source said.

The $500 million 6 3/8% notes due 2016 - which priced at par to yield Treasuries plus 522.1 bps - were nine times oversubscribed with 350 orders. About 32% came from the United States, 20% from the Middle East, 18% from the United Kingdom, 15% from Asia and 15% from Europe.

Fund and asset managers accounted for 54%, retail and private banks were 23%, banks were 14% and insurers and pension funds were 9%.

The $1.5 billion 7 3/8% notes due 2020 - which priced at par to yield Treasuries plus 493.2 bps - was six times oversubscribed with 470 orders. About 34% came from the United States, 27% from the United Kingdom, 14% from Europe, 13% from the Middle East and 12% from Asia.

Fund and asset managers accounted for 68% while banks were 14%, retail and private banks were 14% and insurers and pension funds were 4%.

Also from the Middle East, Saudi Arabia's Islamic Development Bank set price guidance for its dollar-denominated sukuk offering of benchmark-sized notes at mid-swaps plus 40 bps, a market source said.

CIMB, Citigroup, HSBC and Standard Chartered are the bookrunners for the Regulation S transaction, which is being marketed on a roadshow until Wednesday and expected to price soon after.

Proceeds will be used to increase lending to member states coping with economic crisis.

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