EM debt heavy as stronger dollar takes a toll; Chile’s ENAP prices notes; Mexico weakens

By Rebecca Melvin

New York, Oct. 30 – Emerging markets debt was heavy on Tuesday as a stronger dollar took a toll on spreads, but overall volume was light as volatility continued to rock the broader markets, market sources said.

Mexico’s bond spreads were about 15 basis points to 20 bps wider and the peso was much weaker, spiking to more than 20 to the dollar on Monday from 19.36 on Friday, after president-elect Andres Manuel Lopez Obrador said he is cancelling a $13 billion airport project, fanning fears that the leader could veer away from policies that are business friendly.

Petroleos Mexicanos’ 6½% bonds due 2027 stood below 97 on Tuesday from above 98 on Friday.

There are also about $6 billion of airport bonds that took a bigger hit than the general Mexican bond market. The airport bonds sank about 1.5 points on Tuesday and stood at about 80 from 85 on Friday, a New York-based market source said.

There were already strikes against those bonds, which had been hurt by rising interest rates among other things, but “a lot of people were backing it and this is really taking a flier with no real in-depth studies,” the source said.

“This has created a lot of uncertainty. We’ll have to see what the guy does afterwards, but it’s a huge precedent to set and the way it was done was badly managed,” a source said regarding the decision to scrap the airport.

AMLO, as the president elect is known, announced the project is being canceled following a referendum in which 70% of the 1.07 million participating voters rejected the plan.

“This is a reality check that caught many who had been lulled into a false sense of security,” the market source said.

Meanwhile Brazil’s sovereign bond spreads were stronger, as market players anticipate favorable changes for Brazil under Jair Bolsonaro, the far-right candidate elected to be president on Sunday.

Brazil sold off initially on Monday as people booked gains after the election, but now the general direction is expected to be positive “if he can do the hard stuff like pension reform,” a market source said.

“The election has given the markets the outcome they were hoping for, with the election of a market-friendly candidate. As such, the impact on the credit we follow is likely to be positive in the short term (as we have seen from the performance of the real since polls started to point to such outcome),” Gimme Credit analyst Cedric Rimaud told Prospect News.

“Then it will very much depend on the economic choices that will be made by the new team. Brazil, as a country, faces big challenges, with rising debt, trade issues, economic policy, pension reform, energy policy, etc. The performance of some of the credits we follow depend directly on economic choices that the new government will make,” Rimaud said, citing Petroleo Brasileiro SA bonds with diesel prices and Embraer regarding a pending deal with Boeing. And trade policy is also critical for a number of the large credits.

In the primary market on Tuesday, Empresa Nacional del Petroleo came with deal for $680 million of 5¼% senior unsecured amortizing notes due 2029. The ENAP bonds priced at 99.915 to yield 5.261%, or U.S. Treasuries plus 215 bps, which was on top of guidance but tight compared initial talk at Treasuries plus 225 bps.

And Mexico’s Engenium Capital started a roadshow for a planned offering of perpetual subordinated bonds. The proceeds of Engenium’s bonds will be used to help fund its acquisition of TIP de Mexico.

Elsewhere, Islamic Development Bank was talking a €500 million five-year sukuk to yield mid-swaps plus 20 bps to 25 bps, according to a market source on Tuesday.

The initial price guidance comes a week after roadshow meetings wrapped up for the lender’s inaugural euro benchmark sukuk.

Credit Agricole, LBBW, Natixis and Standard Chartered are bookrunners for the Regulation S notes.

The issuer is a Jeddah, Saudi Arabia-based lender.

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