Sabesp, E-CL, others sell notes as spreads tighten; VTB, Galaxy plan renminbi offerings

By Christine Van Dusen

Atlanta, Dec. 9 - The deal pipeline finally reopened on Thursday - with new issues from Development Bank of Kazakhstan, Chile's E-CL SA and Brazil's Telemar Norte Leste SA and Sabesp - while investors remained wary of the European economic crisis and continued protecting the gains they've made so far this year.

"Despite core equities seeing modest gains and the U.S. Treasury yield spike partly reversing, EM assets were unable to gain any real positive momentum on Thursday," according to an RBC Capital Markets report.

"The market generally has been tightening in considerably over the first three days of this week," a Connecticut-based trader said. "The EM dollar bonds almost universally held their prices or moved a bit higher."

Mexico's century bond, for example, was up about 15 basis points to 20 bps.

"There's just an overall hope from the buyside that they'd prefer not to do anything if they don't have to," he said. "So even in the midst of a Treasury sell-off they're holding on to their positions and the street is really not adjusting prices as Treasuries go down.

"So we're seeing more tightening than we should, but it's more due to the overall apathy in the market at year-end. They don't want to do too much this late in the game."

Telemar, Sabesp sell notes

The JPMorgan Emerging Markets Bond Index Plus spread closed down 2 bps, with Ukraine tighter by 14 bps and Venezuela by 21 bps.

"It looks like the market seems to be in decent shape," a New York-based market source said. "It seems like the underlying Treasury yields are relatively stable today, and I think there's a decent tone in the market. We're seeing a couple of deals out there."

Among them was Brazil-based telecommunications company Telemar Norte Leste's €750 million 5 1/8% notes due Dec. 15, 2017, which came to market at 99.828 to yield mid-swaps plus 240 bps, a market source said.

HSBC, Santander, BB Securities and Espirito Santo Investment Bank were the bookrunners for the deal.

Also from Brazil, water and sewage services provider Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) priced $350 million 6¼% senior notes due Dec. 16, 2020 at 99.086 to yield 6 3/8%, a market source said.

Itau and Santander were the bookrunners for the Rule 144A and Regulation S notes.

KDB, E-CL do deals

In another new deal, Development Bank of Kazakhstan priced $500 million 5½% notes due Dec. 20, 2015 at 99.055 to yield 5.72%, a market source said.

Deutsche Bank, Citigroup, JPMorgan and Halyk Finance were the bookrunners for the Rule 144A and Regulation S deal.

And Chile-based gas and electricity holding company E-CL priced $400 million 5 5/8% notes due Jan. 15, 2021 at 98.432 to yield 5.832% via JPMorgan and Deutsche Bank.

The Rule 144A and Regulation S notes include a make-whole call at Treasuries plus 40 bps.

"It had been very quiet, but today is the first day we've started to see a few things open up in the primary market," the trader said.

Said the New York market source: "Today represents a decent window of opportunity. Next week is already relatively late to do a deal. Today is relatively stable. So if you want to get something done before the end of the year, this is the right window to look at."

VTB, Galaxy plan notes

In other deal news, Russia-based VTB Bank mandated HSBC and VTB Capital as bookrunners for a renminbi-denominated issue of three-year notes, a market source said.

A Regulation S transaction is expected to price soon, subject to market conditions.

This follows the lender's postponement, in late November, of a real-denominated offering of five-year notes via BTG Pactual and VTB Capital in a Regulation S-only deal. The notes were whispered at a yield in the 12½% area before the deal was canceled.

Thursday also saw Hong Kong-based casino and hotel operator Galaxy Entertainment Group Ltd. set guidance for its planned RMB 1 billion three-year fixed-rate senior unsecured bonds at the 5% area, a market source said.

Bank of America Merrill Lynch, BOCI International, HSBC and UBS are the bookrunners for the Regulation S transaction.

Proceeds will be used as general working capital for the issuer's and its subsidiaries' non-gaming business and will provide additional financial flexibility.

Renminbi bonds are hot

VTB and Galaxy join a growing list of issuers seeking to jump on the renminbi bandwagon and capitalize on the strong appetite for yuan-denominated notes.

"China has, in the past, been the hardest to gain entry to. That's starting to loosen up," the Connecticut trader said. "That, combined with the fact that China is driving the global economy, is garnering increased interest in Chinese deals."

The deals are also of interest because investors are looking to diversify away from dollar-denominated assets, he said.

"Then there's the pressure from Washington for China to allow it to strengthen, so there's a general sense on Wall Street that the direction of the yuan is going to be toward strengthening over the next six months to a year," he said. "That's motivating people to say, 'what do you have in yuan-denominated assets that I can buy?'"

Ivory Coast in focus

The trader was also keeping an eye on Ivory Coast on Thursday, where president Laurent Gbagbo has refused to accept the results of last month's elections and is rebuffing the international community's call for him to step down and transfer power to his opponent.

The United States is now threatening to impose sanctions on the West African nation.

"The 2032 bonds are off close to 10 points since the election results came out a week ago Sunday," the trader said.

"We've been active in that one. It's a special situation with old-school election issues and post-election violence and uncertainty."

Sell-off will continue

Looking ahead in emerging markets, yields are expected to climb, according to a Barclays Capital research report.

"After the recent large sell-off, rates should stay range-bound for a few months before resuming their rise next year," the report said. "A continued economic recovery and the gradual removal of policy accommodation should pressure yields higher, but that will likely be offset by strong Fed buying and the recent trend in inflation data."

Swap spreads are likely to widen in the medium-term, the report said. "Peripheral spreads should tighten over the course of the year."

And the sell-off should pick up in pace in the second half of 2011.

"We believe the global recovery is on solid ground, monetary policy is at depression-fighting levels, and EM economies are generally in a good spot," the report said. "High-quality external debt should outperform U.S. rates, but earn bond-like returns."

Barclays favors higher-yielders such as Argentina and Venezuela. Still, equities are expected to outperform bonds.

"Capital inflows to EM slowed in the last two weeks of November due to heightened concerns about the fate of Europe," the report said. "Should market concerns about Europe abate fully, the capital inflows are likely to resume and drive asset prices up."

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