Serbia sees window to price $1 billion of notes; EM volumes better, but investors wary

By Christine Van Dusen

Atlanta, Sept. 21 - Serbia priced $1 billion of notes on a Wednesday that saw some liquidity and fairly healthy volumes for emerging markets assets but a defensive posture from investors as selling pressure increased.

"For a brief while on the open there appeared to be a bid for some cash bonds," a London-based trader said. "The Ukraine sovereign opened firm and even had some tentative bids in the corporates. Russia's quasi-sovereigns were also firmer by a quarter-point and the non-metals in the corporate space were a half-point firmer."

But as the session went on, the mood again became cautious.

"The good news is that reasonable volumes are going through and there is some liquidity," a trader said. "But it hasn't stopped the market from widening again as the selling pressure continues to move from off-the-run assets onto more liquid names."

Standouts on Wednesday included Dubai Water and Electricity Authority and Morocco.

Also on Wednesday, Abu Dhabi's Union National Bank PJSC was planning a roadshow via bookrunners Citigroup, Deutsche Bank, HSBC, National Bank of Abu Dhabi and Standard Chartered Bank.

Gazprom, KMG under pressure

Gazprombank and KazMunaiGaz, in particular, came under pressure, as did Turkey.

"Turkey is an underperformer as the excitement from yesterday's local currency rating upgrade wears off," he said. "But the banking sector there continues to impress, outperforming the sovereign by typically 25 bps in the last month."

Said another trader, "Turkey's sovereigns are a touch softer and corporates are fairly quiet."

Later in the day, the sovereign curve was down 1 to 2 points.

"They've had relatively few prints on the corporates today, with Akbank papers seeing the majority of the activity," he said. "Elsewhere, the illiquid corporates keep bleeding slowly."

DEWA stands out in region

In other trading on Wednesday, small buying was seen for Dubai-based DP World's 2017s as well as for Sharjah Islamic Bank and Emaar Properties. Some selling was seen for Islamic Development Bank's 2016 dollar notes.

"I still think Dubai Water and Electricity Authority's 2016s go to the top of the class now," the London trader said. "That's tighter by 5 bps over the month, versus DEWA's 2015s, which are wider by 40 bps and DEWA's 2020s, wider by 53 bps."

Other notes from Dubai started to show some cracks by late in the session on Wednesday, another trader said.

"There are very few constructive bids around on the sovereign," he said. "And Emaar is also going out heavy. On Emirates' 2016s the Street is short still from ongoing local and retail demand. Hence, that bond closes basically unchanged at 99.25 bid, 99.50 offered."

Kipco widens

Kuwait's Kipco closed at about 20 bps wider. "Sukuks remain fairly well behaved, all things considered," he said. "I'm starting to see some paper around though, even on the rare Sharjah Islamic Bank and Ras-al Khaimah paper."

The Middle Eastern market has retained some support from locals, he said, as well as from the Street being short "to those people chasing a safe haven," he said.

"However, this obviously means it can be a victim of its own success," he said. "The market knows the fiscal situation and wall of money around in the region. However, on the relative value point of view versus what has happened in other parts of EM, the region looks exposed."

Morocco outperforms

Looking to Morocco, the sovereign's bonds remained in demand on Wednesday, with the 2017s tighter by 25 bps while the 2020s have widened by 33 bps.

"Morocco's 2017s remain very impressive on some decent local demand," a trader said. "I still think there is some merit in the switch out of 2017s into 2020s."

The 2017s were trading Wednesday at 103.62 bid, 104.12 offered while the 2020s were seen at 90.25 bid, 91 offered.

Africa, overall, was fairly illiquid, a trader said.

"There remains a bid for Egypt paper, but otherwise it's classic Africa - when it's bid, it's really bid, and when it's not, it's not," he said.

LatAm tone 'sluggish'

In Latin America, credit markets opened with a sluggish tone and activity limited mostly to high-grade, liquid names like Brazil's Petroleo Brasiliero SA (Petrobras) and Mexico's Petroleos Mexicanos SA (Pemex), a New York-based trader said.

"We are basically where we left off yesterday in price and spread, which is a positive considering that both Latin America credit default swap protection has become more expensive," he said. "It seems the gravitation away from illiquids and high-betas and into the more liquid low-betas strengthens a little every day."

Most of the cash that gets put to work stays within the global benchmark names, he said.

"It seems the market keys on a different illiquid high-yield name each day," he said. "Last week it was Banco Fibria and Odebrecht. The last two days it has been Minerva SA and JBS-Friboi as dealers push it down hard in sympathy with Marfrig Alimentos SA and with bids difficult to realize."

On Wednesday investors were interested in Hypermarcas SA's 2021s. And later in the session, Brazil's 2021s were seen at a 108.75 bid.

Serbia sells notes

Serbia priced a $1 billion issue of 7¼% notes due Sept. 28, 2021 (/BB/BB-) at 98.263 to yield 7½%, a market source said.

The notes were talked at 7 3/8%.

The Rule 144A and Regulation S transaction was led by bookrunners Deutsche Bank and JPMorgan.

"That's a tough one to price, given the general illiquidity of the sector," a trader said before the final terms were released. "I do think this deal looks cheap, though. The current Serbia 2024s are a poor comparison, given that it's a restructured asset with non-vanilla cash flows. This is the first chance to buy pure eurobond risk to this BB name, with a 40% debt to GDP ratio. That will surely look appealing at such a premium to Georgia. But then again, 25 bps discounts to fair value have been happening frequently in the U.S. high grade market."

Said another trader, "They have given it plenty of discount to get done."

Union National Bank roadshow

Abu Dhabi-based lender Union National Bank will hold a roadshow in Asia, the Middle East and Europe, a market source said.

A benchmark-sized offering of dollar notes could follow, subject to market conditions.

Citigroup, Deutsche Bank, HSBC, National Bank of Abu Dhabi and Standard Chartered Bank are arranging the investor meetings.

With several high-grade issues coming to the market on Wednesday, EM investors were encouraged.

"It's nice to see the new issue market coming back to life in high grade," a trader said. "Perhaps an EM name will pull the trigger soon."

EM: No safe haven?

Despite the recent volatility for emerging markets debt, many investors still view the asset class as a safe haven. But, according to a report from RBC Capital Markets, that could be ill-advised.

It's true that EM assets do look solid, fundamentally, as compared to their developed-market counterparts, the report said.

"While having recently downgraded our EM growth forecasts, we continue to foresee healthy economic expansion driven by domestic demand, providing a timely offset to external weakness," RBC said in its report. "EM banking systems look well prepared to withstand current levels of global financial strains. Lastly, very strong capital inflows are helping to support growth dynamics in an environment of stall-speed expansions in the United States and the euro zone while also adding to local financial market strength."

But while fundamentals look healthy and flow data shows that investors are favoring EM, RBC doesn't expect this to remain the case if global financial market strains intensify.

"The significant scope for profit-taking, which has already begun over the past week ... in the context of large losses elsewhere in global markets, will likely see underperformance for this asset class at the margin," the report said. "Given EM local fixed income inflows tend to correlate well with the growth and hunt-for-yield inflow cycles, we expect their sensitivity to recent global growth downgrades to become more acute if further economic weaknesses intensify."

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