EM bonds suffer after Fed remarks; Maoye sets roadshow; VEB, EMAL could issue notes

By Christine Van Dusen

Atlanta, June 19 - Bonds took a beating on Wednesday on the news that the U.S. Federal Reserve could reduce its bond-buying program, a move that would likely send short-term interest rates higher.

"Just when you thought the FOMC statement would be much ado about nothing, given what's already been stated, EM corporates get rocked again, although it took some time to fully materialize," a New York-based trader said.

Names like Brazil's Petroleo Brasileiro SA (Petrobras) and Brazil's Vale SA were at least 30 bps wider by Wednesday afternoon, he said.

Prior to Bernanke's remarks, the Markit iTraxx SovX CEEME ex-EU index spread opened at 218 basis points over Treasuries, wider by 2 bps. The Markit iTraxx Crossover index spread - seen Tuesday at 442 bps over Treasuries - widened by 4 bps early in the session.

As investors held a wait-and-see posture ahead of the speech, some emerging markets bonds found support in early trading, a London-based analyst said.

"Turkish corporates are up 1/2-point, with the sovereign unchanged," she said. "Russian corporates are 1/4-point better."

But by late afternoon in New York, the mood turned sour. Contributing to the negative tone were protests in Brazil, spurred by transportation fare hikes, corruption and violence. And the instability in Turkey remained in the back of investors' minds.

"It's as if we are circling back to the dark days of a few weeks ago, officially giving up a good portion of the gains we made back," the New York trader said. "Expect to open lower as there is little faith left in our markets right now."

Spreads mixed

Spreads for bonds from the Middle East were "a mixed bag, depending on the Street positions and client inquiry," a London-based trader said.

He pointed to Abu Dhabi Commercial Bank's 2023 notes, which closed about 45 bps tighter on the week, and International Petroleum Investment Co.'s 2022s that were 10 bps wider on the day.

"The long end did see some nibbling on IPIC's 2041 and Qatar's 2042 this morning," the London trader said. "Flow-wise, overall, it was fairly balanced."

DEWA, Qtel stand out

Notes from Dubai Electricity and Water Authority have managed to put in a solid week so far, particularly the company's 2018 notes, the London trader said.

"DEWA's 2020s wen through today between 117 and 117¼ on the bid side," he said. "Perpetuals also saw better buyers."

Also from the Middle East, Qtel International's 2014s through 2023s were popular on Wednesday after Standard & Poor's affirmed the company's ratings.

Israel Electric ticks up

The London analyst was keeping tabs on trading of the new two-tranche issue of $1.1 billion notes due 2018 and 2023 from Israel Electric Corp.

The deal included $600 million 5 5/8% notes due 2018 that priced at par to yield 5 5/8%. The notes were talked at a yield of 5 5/8%. On Wednesday morning, the notes were trading up by 1½ points.

The second tranche of $500 million 6 7/8% notes due 2023 priced at par to yield 6 7/8%. Price talk was set at 6 7/8%. The 2023 notes were up 1 point on Wednesday morning.

Barclays and Citigroup were the bookrunners for the Rule 144A and Regulation S deal.

"Performing well," the analyst said.

Ukraine activity muted

Activity among eurobonds from Ukraine has so far this week been muted, said Svitlana Rusakova of Dragon Capital.

"Weak, but definitely far from panicky," she said.

The sovereign curve has been spotted up by 30 bps, albeit with limited activity.

"There was only some Ukraine 2023 traded on the market," she said.

Some demand has been noted for the 2014 notes from JSC Naftogaz of Ukraine and the 2016 notes from JSC State Savings Bank of Ukraine (Oschadbank).

Maoye picks bookrunners

In deal-related news, China-based department store company Maoye International Holdings Ltd. has mandated four banks to market an issue of dollar-denominated notes during a roadshow, according to a company filing.

Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan are the bookrunners for the Rule 144A and Regulation S deal.

The proceeds will be used to refinance existing indebtedness and for general corporate purposes.

VEB, EMAL consider deals

Russia-based lender Vnesheconombank (VEB) could issue new notes in July, a market source said.

And Abu Dhabi's Emirates Aluminium (EMAL) is looking to print $1 billion of bonds, a market source said.

No other details were immediately available on Wednesday.

Transition period underway

Taking a broader look at emerging markets bonds, Barclays is advising investors to add short-dated quasi-sovereign notes from Russia as well as corporate bonds from Mexico, shorter-dated bank bonds from India and property names from China.

"We have likely entered a long transition towards a normalization of core market interest rates, in which episodic price corrections can create selective opportunities in EM," the bank said in a report. "We expect EM to underperform DM in the near term, though buying opportunities should arise later in the quarter."

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